For the last few years, I have been participating in my company’s stock purchase plan at the maximum level. Every paycheck, ten percent of my gross salary is withheld. At the end of each quarter the funds are used to buy my company’s stock at a 15 percent discount from the lower price of either the first day or last day of the quarter. As my company’s stock declined mostly due to the economy at large and the industry in which I work, this was a losing proposition. I decided not to sell the company stock until prices returned, rather than selling at the first available opportunity as I had been earlier.
So now I have company stock that I have been holding since December 31, 2007. About half of the shared purchased then and since then are in a losing position while half are now in a winning position. My only opportunity to sell this quarter is closing soon, so I should decide what to do. Here are some of my options:
- Sell all of it. It’s risky to hold so much in one stock, and I already have company stock in my 401(k). I can write off the losses against the gains to reduce tax liability.
- Sell the shares in a losing position. I can write off the losses against any realized gains if I sell stocks later this year.
- Sell nothing until they are held for two years. The stock will probably go up, and after two years, they will be long-term capital gains, taxed at a lower rate.
- Sell the shares in a winning position. This would help my cash flow, but I’ll owe income tax.
What would you do?
CNN is featuring a short survey to help you determine your level of financial health. The result is presented in a form of a grade from F to A+. My result was an A; I lost points for not having any life insurance. The survey does not ask if there are any dependents. Right now, I am the only person depending on my income for survival.
The survey questions visitors about annual income and your age in order to determine the healthy expectations for the other categories. For the highest score, your monthly housing payments should not exceed 28% of your gross income. That’s almost unheard of for many people who purchased houses in the past few years. Monthly debt payments should not exceed 36% of your gross income. CNN further suggests three months’ worth of expenses in a high-yield savings account. The editors also subscribe to the rule of thumb that suggests the percent of your portfolio invested in stocks should be 120 minus your age.
Also related to diversification, you will lose points if you have more than 10% invested in your employer’s stock. For life insurance, a category where I failed according to CNN’s algorithm, you should have enough coverage to provide a replacement for your income for at least 5 years, 10 years if you have multiple dependents. The survey asks about your contributions to and balance of your retirement account. If the combination of the two, while taking your age into account, results in a favorable outcome as judged by CNN, you will pass this question.
Here are my results.
Take the survey here and share your results!
In March 2006, my company rewarded its employees for achieving an enterprise financial milestone by offering a company stock bonus, designed to vest on March 14, 2009. The vesting period was perhaps designed to create an incentive for employees to stay with the company. When the bonus was announced, the stock grant was worth about $2,000. At the high point last year, the value of the package approached $3,000.
If the bonus were to vest today, each employee would receive the same amount of shares, but the value would only be about $300. The value of a share of my company’s stock has declined 90% from the high. To reclaim that high, the price would need to increase by 818%. That would be 5% a year for 30 years or 3% a year for 75 years. It’s probably safe to say it will be a long time before we see last year’s prices again, if ever.
I don’t see this price changing much for the better within the next week before the grant vests. I suppose I should be happy that I still have a job, although I’m considering leaving to work for myself full-time, and I should appreciate receiving this bonus in the first place.
Management says that our company’s stock price is sympathetic to the rest of the industry and the decline is not due to internal factors.
The New York Post presented an article about David Shorr, a shareholder of Lehman Brothers, who lost $6 million as the company filed for bankruptcy. David spent many years as an employee of Lehman Brothers, building up compensation in the form of stocks which are now worthless.
“What the hell was he thinking?” asked Shorr, who placed much of the blame on the hard-charging executive who has been one of the country’s highest-paid CEOs. When asked if he had any hopes of recovering his nest egg, Shorr just shook his head and waved his hand. “It’s gone,” he said with a sigh.
David Schorr is now a wealth adviser at Morgan Stanley. As a wealth adviser, you would think that he were familiar with the concept of diversification. While the CEO of Lehman Brothers may not have guided the company through the financial mess, as an investor, David has a responsibility to his future self to maintain an asset allocation that isn’t exposed to any one company.
It’s a lesson that many former Enron shareholders may have learned.
Diversification isn’t a guarantee; for example, if American International Group (AIG) had been allowed to fail, the global markets could have tanked, destroying even better-diversified accounts. But diversification limits your exposure to any one company, so it is less likely to lose your entire life savings due to a singular event.
In my 401(k), my employer matches a portion of my contributions, and a portion of that match is in the form of company stock. Every once in a while, I sell that stock and rebalance the allocation among mutual funds to limit my exposure to my company’s performance. Since my salary and benefits are also tied to my company, the less company stock I rely on, the better.
I will admit that I haven’t limited my company stock as much as I should. The last time I diversified out of company stock was over a year ago when the stock was at its highest point; its value, like that of other financial companies but to a smaller extent, has dropped since then.
I Lost $6M Overnight!, Braden Keil, New York Post, September 16, 2008
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