How to Tame the Emotional Roller-Coaster of Owning Company Stock
Many corporate and tech employees accumulate a great deal of employer stock via Restricted Stock Units (RSU), Incentive Stock Options (ISO), Non-Qualified Stock Options (NSO) and Employer Stock Purchase Plans (ESPP). Unfortunately, not many of us learned how to manage concentrated stock positions in school and there are a great deal of conflicting emotions at play and behavioral pitfalls to avoid.
In this episode of Coffee, Sweaters, and Finance!, Morgan Ranstrom, CFA, CFP®, a financial planner at Trailhead Planners and Bill Mulvahill, CFP®, CPA, a financial planner at Essential Wealth, discuss the emotional perils of owning company stock, the behavioral biases at play with concentrated stock positions, and some strategies for overcoming them.
Some questions and topics that come up:
- What are the emotional challenges of dealing with a concentrated stock position?
- The mistakes to avoid when concentrated stock makes up the predominant portion of your net worth.
- What behavioral biases do we often see when individuals own company stock?
- What's the number one strategy for overcoming your emotions and productively managing your company stock position?
Morgan : 00:12 Welcome to the next episode of Coffee ...
Bill: 00:15 ... Sweaters ...
Morgan : 00:15 ... and Finance.
Bill: 00:17 ... and Finance. All right, yeah.
Morgan : 00:18 We're getting better at that.
Bill: 00:19 Yeah, we'll work on it.
Morgan : 00:20 Sounds good.
Bill: 00:21 I have a question for you.
Morgan : 00:22 Great.
Bill: 00:23 We just spoke about concentrated stock and what it is and some of the considerations. Let's talk a little bit about the emotional side of managing company stock. What are the challenges that you see people dealing with emotionally when they have a concentrated position?
Morgan : 00:41 Yeah. There's a few different things going on. One of them is that I think of that phrase , "What got you here isn't going to get you there." A lot of times when people come to us with a large concentrated stock position, this is what got them to a degree of wealth. This is what maybe flipped them from even like the negative to the positive in terms of net worth, that they had school loans, some other debt or something like that. They're straight out of college, and all of a sudden they might have $100,000, $200,000 of net worth. mostly in this stock.
Morgan : 01:13 On the flip side, they might have a few million or tens of millions or something like that. This is really what got them to the degree of wealth. Because of that, they are unwilling to, there's an emotional attachment to that company and they don't want to sell because if it got me here, then it's just going to double, triple. It already quadrupled or it's kind of like a good recent example is Bitcoin. It already went up like 10 million times or whatever it was, and I would expect it to do the same, and that's just not the case. The reason why you have a degree of wealth now is because the stock already did well, and now might be a good time to think about diversifying your portfolio. It's just an attachment.
Morgan : 01:57 The other one that we see a lot is people who inherit some company stock. I think in my experience, at times, there is an attachment. Hey, my mom owned this all through the Great Depression or something.
Bill: 02:10 She held it. She was good with money. She held it, so I want to I want to be good with money like her. She held it, I should hold it too.
Morgan : 02:19 Exactly, or my dad bought this the day I was born and held it all these years. Obviously, we inherited now a good portion of that portfolio or something like that. There's just an emotional attachment. Now maybe there are ways to kind of work around that. but it's hard to sell. It can be really hard to sell, so that's kind of the second one we see. Anything that you can think of on that front, did I miss some?
Bill: 02:41 When I think about this, with money in general, our brain is not built to handle money well. We have all sorts of biases and our emotions get in the way, and it's just not ...
Morgan : 02:56 Let me be clear, Bill's brain is built to to manage well. The rest of us, no. We don't have those types of brains. We have lizard brains.
Bill: 03:02 That's why they should hire us.
Morgan : 03:03 Yeah, right. He was born with CPA brain, the rest of us are apes.
Bill: 03:11 The ape brain isn't good with it, but that brain, all those biases, when you deal with a large [stock] position, it just takes that dial and crank it up. All of those biases are amplified, so recency bias. When something does well in the past, this is what you were talking about. When something has done well in the past, why wouldn't we continue to hold it because it's going to do well in the future too, right? We're projecting the recent past into the foreseeable future, right? When you have a huge position in one stock, that's just amplified.
Morgan : 03:46 I think of loss avoidance bias.
Bill: 03:48 Yes.
Morgan : 03:49 The idea that if the stock hit $100 and now it's down at $80, now you have a loss on paper. You might have started at $20 or $30, or something like that, but now you feel that loss and you're unwilling to sell until it gets back to a $100. In your mind you say, "I'm not going to sell this stock until we get back to its high price." You might never get there again. Really, there's no way to predict that at all. You might hold it all the way down back down to $20.
Bill: 04:16 Yeah. The idea of watching your account value fluctuate and so much of that is driven by this one position because it's concentrated, it's large. What that does is it messes with your mind, seeing the stock price jump, and then fall, and jump again, and what not. It's with one position, like we've talked about, it can be much more volatile than just the broader stock there.
Morgan : 04:41 You're going to feel that on the high side, you're going to feel that on the low side. If it's on the high side, my guess is you'll be skipping to work. It's just the way we're built, nothing wrong with that. On the low side, you might struggle to get out of bed that morning. That might be a rough morning. Once again, that's just human nature. No shame in that. I think what we're tapping into is that the stuff is hard and don't pretend like it's all rational because they're going to feel a lot of emotion around it.
Bill: 05:04 That's the key. That's key. Even if you rationally know what you're supposed to do with it, it's so hard to actually get yourself to execute on that because of the emotions that you're going to be feeling today, in the future, and farther down the road with whatever the stock price is doing. It's just, our brains aren't built for it.
Morgan : 05:24 Right. We should also just point out this isn't just with company stock or something that's a concentrated part of our portfolio. This is with your portfolio in general or even a house price, or something like that. This is just the way we are, and it's good to understand that emotion is involved in money. When we started understanding that, then we can put in habits. We can bring in a team to help us behave in a more optimal fashion.
Bill: 05:49 Set out a clear written game plan beforehand from how you're going to manage it and have a process so that you're not shooting from the hip and making those decisions based off the highs and the lows that you're feeling at the moment.
Morgan : 06:02 Right, yeah. You don't want to be thinking with your lizard brain, your monkey brain whether on the high side of the low side. You want to be thinking in a long-term fashion.
Bill: 06:11 Yeah, absolutely.
Morgan : 06:12 Yeah. Anything else you'd add for this conversation, Bill?
Bill: 06:14 I think that's it.
Morgan : 06:15 All right. Thanks for joining us. We will see you next time.