Should employees diversify by selling off shares in their employer?

[ashambles]

Edit: I have moved this post from another thread where I agreed with the suggestion that the employee should sell off shares in his employer - Brendan


Company share schemes are odd, as an employee you've a better idea of what's happening than the outside world. Future products, current sales etc. etc..

When you diversify for safety, you're diversifying from a company where you have (legitimate) insider information into companies you know less about - possibly nothing about.

The only regular employees I know who've set themselves up for life by shares did it by holding on to company shares.

While it looks to be same as someone randomly holding shares in a single company - it's a special case.

 

[Brendan Burgess]

The only regular employees I know who've set themselves up for life by shares did it by holding on to company shares.

Hi ashambles

I would guess that for every one of these people, I could introduce to employees of AIB and BoI who had their wealth wiped out by the crash in bank shares.

So this is not an argument.

Brendan

 

[Brendan Burgess]

as an employee you've a better idea of what's happening than the outside world. Future products, current sales etc. etc..

When you diversify for safety, you're diversifying from a company where you have (legitimate) insider information into

It's been shown time and time again that even senior employees of companies, board directors, have little ability to predict the future share price of the company.

It seems counter-intuitive. Surely the Chief Executive should have a good idea of how the company is going to perform in the future? But it's not just about the company. It's about the economy. It's about the competitors. It's about the stockmarket generally.

So if the directors' share deals do not predict the future share price of the company, I doubt an employee of the subsidiary of a US tech company in Ireland can do so.

Brendan

 

[Brendan Burgess]

In most cases, employees will have share options and shares which are not tax-efficient to sell. So they already have a big share exposure to the company. They should reduce this as soon as they can.

Brendan

 

[Zebedee]

I agree. Sell as soon as you can. If the company tanks not only do you lose the value of shares but possibly your job as well.

 

[ashambles]

I'm largely in agreement.

Should someone have all their wealth in one company - no.

Would I have recommended staff in Irish banks hold their shares - no - no one in those companies understood the risks, and even less so the higher up you went.

Would I follow a CEO or senior executive - never- they will be buying or holding shares simply as a show of confidence.

Should people always sell company shares as quickly as they can? If they need the money - yes always.

If someone is earning more than they're spending then they can decide if they can afford to take some risk. Will this risk always pay off - definitely not.

I know enough cases where holding tech and pharma MNC shares has paid off, that I'd not have a flat recommendation that all staff dump company shares ASAP. Especially if these people and perhaps are involved with the next few years product lines that are being developed.

Personally I sell ESPP within the year as that's my savings from salary, RSUs I treat as extra money I'm prepared to completely lose - but I know that attitude isn't common. (Options nowadays tend not to be given to employees - sadly - but with those they really favoured people who would take risk.)

 

[NoRegretsCoyote]

I know enough cases where holding tech and pharma MNC shares has paid off, that I'd not have a flat recommendation that all staff dump company shares ASAP. Especially if these people and perhaps are involved with the next few years product lines that are being developed.

I think it makes sense to hold on to something, but in the region of 5%. There is huge variance over decades and sometimes things go well.

For example family friend worked for Apple in Cork in the 90s. Share price has increased 100-fold since. Not sure when he cashed in!

 

[PGF2016]

The only regular employees I know who've set themselves up for life by shares did it by holding on to company shares.

But if they had diversified into different shares (as is being recommended) would they not have had a similar outcome?

It's when people sell their shares and buy depreciating assets (cars, bikes, boats, toys etc.) that they lose the long term gains.

 

[NoRegretsCoyote]

But if they had diversified into different shares (as is being recommended) would they not have had a similar outcome?

No.

You can easily find examples of 100x increases/decreases in the price of individual stocks over a decade.

Not for the market has a whole. It's the old risk/reward trade-off.

 

[Brendan Burgess]

It's when people sell their shares and buy depreciating assets (cars, bikes, boats, toys etc.) that they lose the long term gains.

That is a different issue altogether. We are not discussing whether to spend or invest. We are discussing how best to invest money.

 

[Brendan Burgess]

For example family friend worked for Apple in Cork in the 90s. Share price has increased 100-fold since. Not sure when he cashed in!

So what? Wasn't there a time that Apple nearly went bust? One Apple doesn't make a summer.

Brendan

 

[Brendan Burgess]

I think it makes sense to hold on to something, but in the region of 5%.

That is the main point. It's wrong to have your job and most of your wealth depending on one company, no matter how good it is.

But if you have a portfolio of investments worth €200k and €20k is in your employer, that is probably ok. But it's wrong to have all your portfolio in your employer.

Brendan

 

[NoRegretsCoyote]

So what? Wasn't there a time that Apple nearly went bust?

That's when he was working for them

I know it's pure endowment effect stuff, but you would really regret having sold 100% of a stock that subsequently increased 100x.

 

[Baby boomer]

There's a danger in deriving general rules from specific experiences. Sure, there's loads of Microsoft millionaires and Apple millionaires, but how do you know you're in the next Apple or Microsoft? You don't. Nor do the directors and founders. And the founders' tendencies usually are to sell equity ASAP anyway.

Bottom line. You don't know the future performance of ANY share. If you did, you'd quickly be a trillionaire! So, diversify, diversify, diversify.

 

[PGF2016]

No.

You can easily find examples of 100x increases/decreases in the price of individual stocks over a decade.

Not for the market has a whole. It's the old risk/reward trade-off.

I don't think you can just say a definite 'No'. Are there no examples of people who have diversified out of their employers stock and became wealthy?

There are examples of those who stuck with their employer and got rich. And those who diversified and got rich. And those who didn't get rich following both paths.

 

[NoRegretsCoyote]

Are there no examples of people who have diversified out of their employers stock and became wealthy?

It is utterly unambiguous that the expected return of a single stock has much, much higher variance than that of a group of stocks.

 

[Steven Barrett]

You shouldn't be reliant on the same company for your salary and your savings.

Everyone knows that this is correct yet so many people with company stock won't sell. There are a number of reasons for this:

1. Drinking the Kool Aid. They have bought into their company's vision and believe they will be around forever. As posted before, employees really don't know how successful their company will be in the future, there are too many factors that can impact this.
2. Returns. The stock in a lot of these companies have performed very well over the last number of years, so why sell?
3. Tax. They don't want to pay the CGT bill. When they don't sell, the CGT bill doesn't really exist and they look at the gross value as the real value. When they do sell, it is greatly reduced by CGT and the real value suddenly becomes the net (and correct) value.

At the end of the day, it comes down to diversifying risk. Selling out of Apple, Meta or Google will probably result in lower returns over the long term. BUT if those companies either go bust or lose favour, you can lose a lot/ all of your money. Don't believe me? Look at the companies that made up the S&P 500 over time.

History of Companies and Industries Listed on the S&P 500 | QAD Blog

This study explores changes to companies listed on the S&P 500 index over time, which can point to large shifts to the U.S. and global economies.

www.qad.com

Steven
www.bluewaterfp.ie

 

[ashambles]

(Practically no MNC employee will have their entire portfolio in their company since they'll have a pension as well. )

US MNCs tend to pay out share rewards to employees at levels that are not expected to make them so rich they'll quickly have a problem retaining them.

So when you hear of an employee having a multiple of their salary in company shares then it's not because their employer is exceptionally generous it's because they've held their shares for years.

I think the mistake people are making is assuming someone with say 250k in shares and an 80k salary was given around that value in shares by the company, in reality they were probably given a fraction of that, they got there by taking a risk and would never have reached it so quickly by diversification.

When the approach they've taken has demonstrably worked out for people I'd let them follow their own instincts on when to cash in.

The advice I see here would be summarized as
if you're on 80k got 20k in shares in Acme that turned into 200k in company shares - sell today - or ideally years ago you reckless person
if you're on 80k got 20k in shares in Acme that's worth 25k - well done - you can retire a few months early.

 

[Brendan Burgess]

I think the mistake people are making is assuming someone with say 250k in shares and an 80k salary was given around that value in shares by the company, in reality they were probably given a fraction of that, they got there by taking a risk and would never have reached it so quickly by diversification.

Hi ashambles

If I have €250k in shares in one company and no other investable assets, I should sell 90% of those shares.

Whether I bought them for €10k, got a present of them, or bought them for €300k is just not relevant, other than the timing for tax purposes.

Brendan

 

[Zebedee]

Some multinationals make it a condition of promotion that you hold x% of your salary in shares. I’ve seen >100%-150% in some cases. I know one person who used to take out an equivalent short position (this is only likely to be possible with a large quoted co). You’d need to have some spare cash to deal with margin calls etc.