Vested RSUs in a Market Decline
August 4, 2022 | By Manisha Gupta
Do you have restricted stock units (RSUs) that have recently vested? If you work in the tech or financial sectors in 2022, that probably means that you have seen a decline in their value (energy sector folks have this in recent memory). You might be faced with the dilemma of deciding whether to sell or hold your RSUs. We prefer a simple decision making process when it comes to RSUs.
To sell or not to sell vested RSUs, that is the question.
Vested RSUs are very similar to cash bonuses on the day of vesting. In that moment, they have the same exact value as an equivalent cash bonus (before tax withholdings). But RSUs come in the form of company stock, so their value will change beyond the point of vesting. A helpful way to think about this is: would you use all or part of your cash bonus to buy your company stock? If not, you can liquidate your RSUs and use the cash like you otherwise would. In a sense, if the stock lost value recently, it means you received less ‘cash’ bonus than you anticipated. This can be disappointing but RSUs don’t come with a price guarantee.
RSU cash value represents a portion of your exposure to your company’s stock price. RSUs are often issued in a series, creating unvested future value, which can be a substantial portion of your potential net worth, and will benefit you when the stock price increases. It can be helpful to reframe your RSUs as components of your net worth. Here’s a simple example:
Vested RSU value = $50k
Unvested RSU value = $200k
401k value = $500k
Home equity = $250k
Total Net Worth = $1M
In this case, unvested RSUs are 20% of the (potential) Total Net Worth. Monthly paychecks and normal cash bonuses also rely on the employer, further increasing risk associated with a single company. Total financial exposure to an employer in this situation is at a life-changing level, for better or worse. If you are concerned about the ‘worse’ outcome, treating your vested RSUs like cash is a good way to diversify your assets and improve other areas of financial weakness.
But what if your employer stock is down big…. really big, like -40%? We are sympathetic to the idea of not wanting to sell after a steep decline like that, particularly if you have confidence in your company’s future. Here is a simple process to evaluate your options:
1) Financial security check. Start here and proceed to 2) if you still have vested RSU cash value available.
- Do you have an adequate cash reserve? If you are counting on vested RSUs to replenish your cash each quarter or year, you may have no choice but to sell and restore your cash reserves, or risk going into debt. In this case, take a moment to reflect on how much risk you are taking at your current level of spending. Without those RSUs, you may be underwater.
- Do you have high interest or floating rate debt that is squeezing your cash flow? Consider using RSU cash value to pay those down or off to improve your cash flow.
- This might also be a good time to revisit your plans for bigger projects like a kitchen remodel or expensive vacation. If you want to reduce your risk of not being able to do those things, consider setting aside cash rather than keeping those funds invested.
2) Investment allocation decision. If you made it through 1) you still have some decisions about how to invest.
- You can keep it invested in your employer stock and hope the future returns exceed the average market return. Keep in mind that you are biased by your personal experience with the company, which makes any specific insights you may have difficult to honestly sort out. This is true for everyone. (Enron reminder)
- You can liquidate your vested employer stock and invest in the broad market index, so you will benefit from the recover and growth of the overall market, whether or not your company has good fortune.
- You could even diversify more specifically within your industry using a sector index fund. There are ETFs for everything: energy, tech, health care, real estate, etc. If part of the reason your stock is in decline is a broad sector sell off, and you want to be invested for that specific recovery, you can diversify by also investing in your competition with this approach. The energy industry collapse of 2020 comes to mind.
- Our least favorite choice would be to sell your employer stock, keeping it in cash, and hoping to buy back in at a more opportune time. The odds of success with that strategy are low.
Another way to go about this is to maintain a constant target exposure to the employer stock as a percentage of your net worth, like in the example above. Start by figuring out how much of your net worth is tied up in your company stock. There is no right answer. It’s a matter of risk and reward. A general rule of thumb is to not have anything more than 10% of net worth in one single company, up to 20% if you are particularly optimistic and comfortable with the risk. For some, the best answer is targeting 0%.
Should I sell my RSUs if the current value is less than the value at grant date?
One of the common arguments that we hear people make about selling vested RSUs in a declining market is that they will wait for the stock price to reach the same price as it was on the grant date.
It is true that given the current overall decline in stock markets, you have probably lost 20% or more (especially if you work for one of the tech firms) of your RSU value from the grant date. However, the price of the stock at grant date carries no value beyond that date. It is merely used to calculate the number of shares you will be granted. To give an example, if you joined Meta (Facebook as it was called then) on July 30th, 2021 and were granted $100,000 of RSUs to vest on July 30th, 2022. The price of a share of Facebook on July 30th, 2021 was around $354. That means you were awarded around 282 shares of Facebook (100,000 / 354). Beyond that, the price at grant date does not hold any significance. On July 30th 2022, you will receive 282 shares of FB at the current price.
In psychological terms, we call this inclination to wait for the price to come back “anchoring bias”. The anchoring effect is a cognitive bias whereby an individual’s decisions are influenced by a particular reference point, or ‘anchor’. If you first see a T-shirt that costs $1,200 – then see a second one that costs $100 – you’re prone to see the second shirt as cheap. Whereas, if you’d merely seen the second shirt, priced at $100, you’d probably not view it as cheap to begin with.
When it comes to selling the RSUs after a decline in market value, this anchoring bias highly influences the decision making process. However, historical data shows that anchoring bias can be quite dangerous when it comes to stock markets. One of the ways of overcoming the anchoring bias is to have a rational decision making process such as the one outlined above.
If you are still thinking twice about selling the vested RSUs when they have declined in value, ask yourself this question “Are you anchoring to the price at the grant date?”
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