Coulda, Woulda, Shoulda – The Tales of Selling Company Stock
Coulda, woulda, shoulda – the lament of anyone who has ever sold stock too soon or held stock too long. This rings especially true when talking about stock in the company for which you work. The issue of When to Sell our company stock has caused more disagreements than almost any other financial decision in our house. Don’t get me wrong – we’re thankful that my husband receives yearly stock awards from his company. But when is the best time to sell?
We’ve heard horror stories from some of my husband’s colleagues. The share price of stock in the company for which my husband works has dropped from a high of $242 (in 2007) to a low of $6 (in 2012.) Currently it’s trading around $14, but that’s still a long way off the high. While many other companies have surpassed their pre-recession highs, sadly, our company is not one of them. One of my husband’s former colleagues admitted to my husband that he has never sold a share of his stock. He’s been with the company since 2004, so he had plenty of chances to sell the stock before it started its massive decline. But he held on through the peak, down in the valley and is still holding on. He admits he has nightmares because he didn’t sell and missed his chance to make a boat load of cash. And it could be a long time before the stock rebounds to its high, if it ever does. Ouch!
We also know of a friend of a friend who had most of his retirement savings in the stock of his employer – Nortel. He lost almost all of his retirement savings in the Nortel scandal (and subsequent bankruptcy) a few years back. At its peak, Nortel was valued at 1/3rd of the total value of all companies listed on the Toronto Stock Exchange (TSX) and employed 100,000 people worldwide. Double Ouch!
Many companies offer employees a chance to own a stake in their company. While plans vary from company to company, the most popular programs are: Employee Stock Purchase Plan or ESPP, Stock Options and Restricted Share Units or RSUs.
At my husband’s current company, he is awarded RSUs on an annual basis. The RSUs vest over a 3-year period: 1/3rd of the total number of shares vests each year for 3 consecutive years. The number of shares he’s awarded varies from year to year. My husband started working for the company in 2011 and the first year he was eligible to sell RSUs was 2012.
There is data to prove that it is more financially advantageous for employees to sell their shares immediately upon vesting, assuming the shares are not under water (worth less than the current stock price) and invest the proceeds in the broader market. Using data from technology IPOs (from 1990 to 2012) and mature companies (included in the S&P 500 during the past 20 years,) researchers compared the stock price of companies during several time periods versus the benchmark index of the S&P 500. They determined that few companies outperformed the benchmark with regularity.
Experts agree there are other benefits to selling company stock immediately upon vesting:
1. It prevents the employee from being too heavily weighted in one company’s stock in proportion to the rest of their investment portfolio
2. It releases the employee from the emotional stress of trying to time the market
3. The employee is not reliant on a single company for earned income, as well as investment income
Unfortunately, we invest more on emotion, than historical data or expert advice. At our house, every time we have shares that vest, we go through the same emotional roller coaster. Should we sell or hold? What if we sell now and the stock goes up? What if we don’t sell and the stock goes down? It’s a no-win battle when dealing with emotions. To prove the point, here’s a look at how our RSU sales have shaped up over the past 5 years. Spoiler alert – it’s not pretty.
All I can say about this chart is UGH! We tried to time the market for many years. As you can see, we’ve had mixed results. I’ve also included the high and low share price for each year. Tying to time the market in a stock with such wild fluctuations every year is even more challenging! Again, we’re grateful that my husband is awarded RSUs, but looking back over the chart, it’s clear we’re not very good at timing the market. During 2014 and 2015, we sold some of our RSUs around $13 per share. However, we held onto a bunch of shares, hoping the price would go up. When the stock started going down, we got nervous and decided to sell around $12 per share, thinking that the stock might go back down to $7. Bad, bad decision. Today the stock is trading around $14 per share. Just think what we could have made if we had waited until now to sell all our shares. But these are the head games investors who try to time the market play.
As it turns out, we would have been better off financially if we had sold all of our shares immediately and invested the proceeds in an S&P 500 index fund. And it would have been a lot less painful emotionally.
At the beginning of this year, we decided to no longer hold any shares past the vesting date. We sold shares in April, May and October. And we have no regrets about the decision. So, what was the catalyst that encouraged us to no longer try and time the market? A very wise financial mentor asked me if I had an extra $10K, would I invest that money in shares of my husband’s company or would I invest the money somewhere else? The answer was a no-brainer. I would definitely invest the money elsewhere. The mentor replied that if you don’t sell shares in your company when they vest, it is the same as investing found money in shares of the company. This comparison made perfect sense to me – I just wish we’d heard it back in 2012. Coulda, woulda, shoulda.