Robert J. Pyle
While you may have great faith in your company's stock, you also need to diversify your investment portfolio. For employees with stock options, doing this successfully requires a careful analysis to figure out the optimal times to exercise and sell.
Once you have settled on a comfortable ownership percentage of company stock in your combined holdings, how do you decide which shares and options to hold and which to sell?
W.E.B. Bantling, with Bruce Brumberg
The biggest challenge I face when counseling my clients is convincing them to avoid owning too much of their company's stock. Tales about employees of Lehman Brothers or Enron who lost their entire net worth have shaken these clients to attention.
Many of my clients do not see stock compensation in the bigger picture of retirement savings and withdrawal plans. Considering net worth, age, and company stock plan, I present the client with these core points about stock grants, 401(k) plans, nonqualified deferred compensation, and IRAs.
Having both nonqualified stock options and nonqualified deferred compensation gives you a tremendous amount of flexibility to optimize your financial planning and tax situation. In this article, I explain how I have used the two plans in concert with one another.
On Wall Street
Many executives hold far too much of their company stock but do not want to sell it, as they feel the stock price may rise again. Prudent diversification requires overcoming these and other psychological hurdles.
If you are reluctant to diversify at least a portion of your concentrated position in company stock, think about the risks and other implications of your decision. Not wanting to trigger large embedded capital gains tax at sale may really be an excuse for an emotional attachment to the stock.
Executives with both concentrated positions in company stock and retention requirements need to understand the risks and strategies.
Even the best financial advisors struggle with developing stock-option strategies and mastering the complicated tax rules. Deciding when to exercise can lead to tradeoffs between diversification and tax planning.
Understand why options have long-term value and how they fit into an overall diversified portfolio and financial-planning strategy.
Experts disagree on what the "proper" amount of company stock is. Figure out how dependent you are on your company's stock, the different places you own it, and whether/how you can diversify.
Maureen Nevin Duffy
Journal of Accountancy
Investors who ignore history are doomed to repeat it. Although this article is not devoted to stock options, it discusses the advantages of an exercise-and-hold approach and diversification in down markets.
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You are in luck. SEC Rule 10b5-1 now provides an affirmative defense...
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