Managing the Restricted Stock Units (RSUs) that your employer awards you is a nuanced process. Diversification is a fundamental principle in modern portfolio theory, and it plays a pivotal role in reducing a portfolio’s risk with a concentrated position. It is essentially the idea of optimizing your returns by spreading money across many different asset classes. Let’s delve deeper into some of the technicalities of RSUs for folks who are heavily invested in RSUs.
Pitfalls of Holding RSUs
A common scenario we see with clients with stock awards as part of their compensation package is that they don’t have a plan around selling their awarded RSUs. In turn, they end up accumulating massive sums in their company’s stock.
While your company’s RSUs could offer potential for substantial gains, they also tether your returns to the success of a single company’s performance. While your company’s stock could perform well, this concentrated exposure could also magnify harmful impacts to your portfolio such as underperformance or volatility. This can seriously impact the nest egg that you’ve worked so hard to accumulate (or are accumulating!).
Effective investment diversification aims to mitigate this risk by spreading your dollars across many different securities, sectors, and asset classes instead of taking the wild ride of a single company.
Managing Stock Awards
One way to combat this overconcentration risk is by consciously implementing portfolio diversification strategies. There are many different strategies, ranging from selling the RSUs when you receive them, rebalancing your portfolio to a preset asset allocation, or setting up different schedules to sell them down the line. Tailored advice can be provided for your unique situation from our team of skilled advisors.
The other side of RSUs to consider outside of diversification issues is the complex tax situation awaits RSU holders. Different parts of your RSUs have different tax treatments. Some will be at your ordinary income rate and some could be at capital gains rates (depending on if you hold the position and for how long).
Thus, strategizing around liquidating these positions is critical. Without being thoughtful about your strategy, it could cause unnecessary tax harm to you such as pushing you into higher tax brackets or causing higher Medicare premiums (if you’re age 63 or older).
It’s also common to feel attached to your RSUs, especially if you’ve worked at your company for a long time, which could result in a liquidation later than optimal.
Engaging Financial Advisors and Investment Professionals
Collaborating with financial advisors that have experience with compensation packages that have RSUs is important so that they can help you sift through the details and implications of your RSUs.
Part of Alaska Wealth Advisors’ financial planning and investment philosophy is to control what we can control – and we all know that taxes are certain. Let’s plan around them and be as efficient as possible!
Katelynn Toth, CFP®
Associate Financial Advisor
Alaska Wealth Advisors, LLC is an investment adviser registered with the United Stated Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Alaska Wealth Advisors’ investment advisory services can be found in its Form ADV Part 2 and/or Form CRS, which are available upon request.
The opinions expressed are those of Alaska Wealth Advisors Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed.
Certified Financial Planners™ (CFP®) are licensed by the CFP® Board to use the CFP® mark. CFP® certification requirements include: Bachelor’s degree from an accredited college or university, completion of the financial planning education requirements set by the CFP® Board (www.cfp.net), successful completion of the CFP® Certification Exam, comprised of two three-hour sessions, experience requirement: 6,000 hours of professional experience related to the financial planning process, or 4,000 hours of Apprenticeship experience that meets additional requirements, successfully pass the Candidate Fitness Standards and background check, agree annually to be bound by CFP® Board’s Standards of Professional Conduct, and complete 30 hours of continuing education every two years, including two hours on the Code of Ethics and Standards of Professional Conduct.
