Does volatility worry you when it comes to the stock you've received as compensation? Learn tips to help manage this valid concern.
Stock compensation can make a big financial difference in your life. Meanwhile, for your company, it motivates employees and helps retain talent. It can be a win-win.
However, individual stock prices and entire stock markets can be volatile. They may quickly rise and fall in unsettling ways, affecting the value of your equity grants and holdings of company stock. When markets become uncertain, remember that investing is often best regarded as a long game. In addition, there are ways you can manage your expectations to reduce your personal reservations.
For starters, it’s essential to be familiar with the type of equity compensation you have, whether nonqualified stock options, incentive stock options, restricted stock, restricted stock units (RSUs), performance shares, stock appreciation rights, or an employee stock purchase plan (ESPP). The nature of the compensation type may affect its potential performance and ultimately shape your expectations. Remember that stock compensation is what experts call a long-term incentive. It’s a tortoise rather than a hare.
Many stock option grants have a 10-year life. That’s a long time in the world of stock prices. Although your company’s stock price may fall or fluctuate soon after the grant is made, options have great leverage if the price rises later. There are no guarantees, but that potential upside can be very rewarding. Meanwhile, restricted stock or RSUs always have value at vesting (unless the stock price drops to zero). So they can balance out some of the volatility that affects stock options.
Remember that your company may issue new grants in the future. In fact, when its stock price is volatile, a company may prefer to grant options or RSUs in increments rather than in one big batch.
Depending on the industry or the economy, stock price volatility can be normal. It can even present a helpful opportunity. It lets you assess your comfort level with financial risk and gauge how you feel about your asset allocations, including stock options, restricted stock/RSUs, company share holdings, and company stock in taxable and 401(k) accounts. If volatility across your investment allocations causes you concern, you may want to consider diversifying some of your portfolio. Diversification can be a basic part of sound investing. You may be less worried about volatility when your net worth is less dependent on a single stock.
There are many variables to consider before making an investment decision, such as your asset allocation, time horizon, current concentration in company stock, risk tolerance, and more. But if you wish to acquire more of your company’s stock, volatility may enable you to do so at lower price levels. But remember even diversification can not eliminate the risk of loss.
It usually makes sense to base your everyday spending on your salary and bank holdings, not on investment income. Relying on gains from equity grants to cover living expenses can lead to big trouble if your company’s stock price drops considerably. Separating investment income from your lifestyle needs will give you an additional layer of protection against stock price volatility.
Remember that help is available. Stock options, restricted stock/RSUs, and ESPPs are complicated instruments. Even experienced investors sometimes find them daunting, especially in volatile market conditions. Talk to your TD Ameritrade Financial Consultant about the role equity compensation plays in your financial picture. We can connect you to the right professionals to help you aim to maximize your strategies so they best align with your goals.
This article was developed with input from myStockOptions.com.