Most people who receive restricted stock units, or RSUs, from their company as part of their compensation plan are gambling with their opportunity to grow wealth — without even knowing it.
RSUs are powerful tools that you can leverage to quickly grow your net worth. But they can just as rapidly spiral out of control and create an unnecessary time bomb within your investment portfolio.
If you have RSUs, here’s what you need to understand about the risks they can pose when mismanaged — as well as the strategy you can use to harness their power for the good of your wealth-building goals.
How RSUs Can Create Unnecessary Risk Within Your Investment Portfolio
Unless you’re proactively managing vesting shares of restricted stock units by systematically selling them and reinvesting the net proceeds into a globally-diversified portfolio, your company stock is likely building up into bigger and bigger percentages of your total net worth.
That is a needless risk that sets you up to make an unforced error.
All investing comes with risks; taking on some chance that you’ll experience losses is unavoidable. But savvy long-term investors know the key to success is taking on just enough risk to earn the return they need to achieve their goals — without tipping over the line to a place where they face a higher probability of loss than they do of seeing gains.
Part of managing risk is deploy time-tested mitigation strategies, including using diversification to reduce potential volatility.
When you let a position of a single stock (whether it’s one granted by your company or not) build into a higher concentration within your portfolio, you open the door to more volatility.
Large concentrated positions can pull your entire portfolio — and your net worth —down with them when they take a nosedive in value. Those large drops and volatile upswings that may or may not last can be avoided (or at least softened) by using proper diversification.
Betting On Any One Stock Is (Usually) A Losing Game
When I walk someone with RSUs through this, and point out that they are overconcentrated in their company stock which introduces unnecessarily high levels of downside risk, I usually get a response that sounds something like this:
“I know I own a lot of my company’s stock — but we’re working on some really big projects, and the price is going to skyrocket in the next 6 months. I don’t want to miss out when it explodes it value!”
Everyone thinks they’ve got the winning lottery ticket. But if you look at the S&P 500 from 2000 to 2021 in five year rolling periods, you’ll see:
- 100% of the stocks on that index dropped by at least 20% at some point in the period
- 63% of the stocks on the S&P 500 went down by 40% or more
If you zoom out even more and look at the Russell 3000 index from 1987 to 2024, you’ll also notice that 33% of those stocks outperformed. That suggests you might have a 1-in-3 chance of picking a winner.
Maybe you think those aren’t bad odds… but guessing wrong is costly:
- 39% of those stocks lost value in the period
- 27% failed to keep pace with the benchmark (but at least provided a return; still a tough pill to swallow if you see how much more you could have earned had you just been properly diversified!)
What should your takeaway be from all of this?
That pinning all your hopes on any one stock taking off is opening yourself up to larger and larger probabilities of experiencing losses.
The kick may be doubly hard if you’re overconcentrated in company stock that tends to build up when you receive RSUs but don’t have a strategy for actually managing that concentration.
You’re financial life is extremely exposed to the whims and overall fate of a single company at that point. Not only is your net worth extremely tied up in your employer’s stock price — but so is your income.
It’s bad enough if you have an overly-concentrated position in a single company. But when that single company also has the ability to fire you, you’re quite vulnerable to an external force you can’t exercise much control over.
For most people, regularly selling shares of RSUs as they vest and then reinvesting the net proceeds into a low-cost, globally diversified portfolio will provide a better result over the long-term than crossing their fingers and hoping their employer happens to be their golden ticket to wealth creation.
There’s no need to gamble or make wishes when you can create your own golden ticket, simply by putting a sound financial system and structure in place for long-term money management.
You Hold The Power To Create The Wealth You Need To Achieve Your Goals
Assuming your top priority is to optimize for long-term growth and reduce the chances of a failed financial plan, the returns of a globally-diversified portfolio featuring thousands of companies in many industries will be more reliable than the returns of any one individual stock or even a handful of stocks.
That same globally-diversified portfolio won’t 10x your wealth in a year. Nothing will unless you take on massive risk for the chance of it paying off.
A properly-diversified portfolio helps avoid the scale of losses that are often caused by concentrated positions, while still providing a 6 to 8 percent return.
That kind of return is more than enough to meet most people’s financial goals. If you combine that growth on your money with a high savings rate, you can achieve very big, ambitious things with your money.
And yes, I know: earning 6 to 8% does not sound sexy or exciting. It’s just not.
But I’ll taking “boring” over “losing 40% of my wealth because I fell asleep at the wheel and failed to manage concentration risk in my portfolio.”
Do you know what’s even more sickening than securing “just” 6 to 8% in returns?
Losing everything you’ve got because you thought you had to swing for the fences, when in reality you just needed to settle in for the ride.
As long-term investors, avoiding massive losses is more valuable than gambling on the chance of outsized returns. Successfully keeping your money in the market and benefitting from compounding returns gives you a very high probability of achieving your financial goals throughout your life.
And isn’t that the whole point? To create enough wealth to meet your specific goals.
A systematic investment management process that leverages a low-cost, globally-diversified portfolio to reduce risk can give you the best possible odds for growing your wealth to support the life you want to enjoy.
Read the full article here
