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Stock Options & Investing: What You Need to Know

For the most part, your company stocks and options shouldn't affect your investing portfolio. Here's why.

Articles by Jon

By Jon Stein
CEO & Founder, Betterment  |  Published: September 9, 2013

In most cases, having company stock shouldn’t influence the overall asset allocation of your portfolio--unless you’re a top exec at a big company, with more than 10 percent of your net worth in stock.

We often get questions about holding company stock or options, especially if you work at a technology company: How should these figure into your portfolio, your short- or long-term plan?

Stick to the plan

In most cases, for most people—no matter which industry you work in—you want to stick to normal investing rules in terms of how you would allocate your investing portfolio.

If we use someone who works in technology as an example, you wouldn’t need to reduce the tech stock holdings in your portfolio just because you’ve got company stock (unless you’re a bigwig at an established tech company like Google or Apple).

In fact, whatever industry you’re in, the following chart helps to explain how you can think through the role company stock plays in your investing strategy. Since we can’t address every situation, consider these rules-of-thumb.

Stock options & your investing plan

If you work at a start-up…

1. Let’s say you work at a typical tech startup or growth-stage company (e.g. VC-funded, between 1-1,000 employees, up to ~$100mm revenue) and you have company stock. Your company is a blip in the big picture of  the markets, most definitely not yet in the S&P 500, and likely not even in the tech indices. Meaning: Your company’s performance isn’t likely to correlate highly with the rest of the tech sector.

Even if tech stocks have a great year, how much is that likely to help your company’s performance—20 percent?  Or maybe your company has a great year and your business quadruples in size. Is the tech sector also going to quadruple? Unlikely. So much depends on your company-specific execution and luck that the correlation is low. Low correlation is what we look for when we talk about diversification. The bottom line: Because there is low correlation between your individual company and the tech sector overall, owning tech stocks or options will not reduce the diversification of your overall portfolio.

 2. Even if you have more than 10 percent of your net worth in company stock/options (you got in early, you’re a founder, you’re a beast at contract negotiations—or you don’t have other investments yet), the same logic as #1 applies. Think of your company stock as uncorrelated with your investment portfolio. You shouldn’t reduce the other tech holdings in your portfolio because of your company stock, because the performance of a small tech company isn’t going to correlate highly with the tech sector as a whole.

You’re in the big time…

3. If you’re at a big tech company, like Apple, Google, or Intel, with less than 10 percent of your net worth in company stock, that’s a small enough stake that you could keep the tech portion of your equity allocation as you normally would. These companies are going to be highly correlated with the tech sector: they might make up 10 percent of the index, and their fortunes are going to correlate more highly with each other and the market. A bad year for Apple might mean bad year for Intel—and bad year for tech companies overall. Still, 10 percent of your net worth ain’t a ton. It’s not worth adjusting your allocation.

4. The one instance where you might want to have less tech stock in your portfolio is if you work for a big player and you’ve got more than 10 percent of your net worth in company stock. Then, yes, you’d probably have the tech sector covered and you’d want other sectors in your mix of equities.

Note that ideally you wouldn’t want to have 10 percent or more of your wealth in company stock, anyway. Think about Enron, Groupon. You already depend on your job for your income and benefits; you don’t want to count on it for your future security. That’s a pretty big gamble. Best to divest when you’re able.

If you’d like to discuss or want more detail, you can email me directly at jon@betterment.com.

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