Wondering when to sell ESPP stocks? It all comes down to asset allocation and risk management.
Q: I’m 59 and plan to retire in a few years from a pharmaceutical company. I have a block of stock options that will soon expire. I was thinking of exercising them and holding the stock for a year or two, hoping for the price to go up. I’m concerned that if I sell now (at a modest gain), the price will go up right after I sell. However, this will leave me with about 10% of my portfolio in company stock – about double what it is now. When should I sell the ESPP stock – or should I obtain and hold it for now?
Taking advantage of an Employee Stock Purchase Plan can be a great way to help build wealth. Receiving stock options, discounted shares or dividends on those shares can be looked at as virtually free money.
But it’s never a good idea to rely on one individual stock – even when it’s the stock of your employer. Unfortunately, there have been a few high-profile cases where workers had most or all of their 401(k) accounts invested in company stock – and they lost all their money (and their jobs) when the companies went broke. Those are extreme examples, of course, but the principle remains that you should not have all of your eggs in one basket.
We don’t know what company you work for or what the prospects are for its stock performance. But this isn’t a conversation about the individual stock; it’s really about asset allocation and risk management – that is, having a balanced and diversified portfolio that fits your level of risk/reward.
As you point out, in your case, if you were to exercise the stock options, your company shares would make up 10% of your portfolio. While circumstances differ, our guideline for most clients would normally be to invest no more than 3% of their assets into any one security. You’re already at 5%, and you might go to 10%. That may prove a higher risk than you are comfortable with.
If you do exercise the options, you’re then faced with the decision of whether to hold the shares for a while or to sell them. And of course, when to sell ESPP stocks. Like all investors, you’ll fear two things: watching the price rise after you sell or watching the price fall after you buy. So whatever you decide, don’t watch the share price every day – that may tempt you into making an emotional or fear-based decision.
While we don’t have a crystal ball to predict when to sell an ESPP you’ve been offered, you now have some guiding principles for how much to invest in one company’s stock while keeping a balanced portfolio. The best advice we can give you, of course, is to consult with an independent, fiduciary financial advisor – one who will always put your best interests first.
Investing strategies, such as asset allocation, diversification, or rebalancing, do not assure or guarantee better performance and cannot eliminate the risk of investment losses. All investments have inherent risks, including loss of principal. There are no guarantees that a portfolio employing these or any other strategy will outperform a portfolio that does not engage in such strategies. Past performance does not guarantee future results.