Putting all your eggs in one basket

Finance
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Throwaway account. I don’t have anyone IRL with whom I can talk about this, looking for advice.

Age: early 30s
Location: Midwest
Salary: 160k base + 66k in equity

Assets
Cash: 50k
Retirement: 435k
Non-retirement brokerage: 340k
Company stock: 150k
House: 300k
HSA: 4k
Cars & toys: 70k

Debts
Mortgage: 190k

Wishlist for the next year:
Kitchen remodel: 20-25k
Boat: 10-20k

The amount I have invested in my company’s stock is getting to the point where it is making me feel uncomfortable, as I feel like it is starting to make up too much of my net worth. The company is a mid-size company, and the stock price has increased about 400% over the past 2 years. The amount is also getting pretty close to what I owe on my house.

What would you do in my situation? I always thought that I would pay off my mortgage in one shot with the amount that I have in the company stock. Now that this is becoming a very real option, I am getting cold feet. The mortgage is about 3% interest rate. If I sold off half my position, and used it towards the mortgage, it wouldn’t really get me anywhere, as the mortgage payment would remain the same. I also don’t want to company stock to go up another 400% in the next 2 years, and I spent all of it paying down a 3% debt.

While I have a fairly high salary on paper, I certainly don’t feel wealthy. Between 401k, IRA, HSA, ESPP and mortgage, my discretionary income is not that high. I have home remodeling projects and expensive hobbies and toys that need constant maintenance, repairs, etc. I always thought that eliminating the mortgage payment would provide some relief and help me feel more comfortable month to month.

I would also be interested at some point in buying 1-2 rental properties. I like the area I’m in, I have done landlording previously. I also need more garage space, and an additional property would allow me to keep the garage for myself and rent out the house without the garage. There are plenty of houses in the area that simply don’t come with a garage, so while this would lower the rental income, it wouldn’t deter someone from renting it altogether.

Any advice?

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Sell company stock the same day that it vests.
Max out 401k/403b and (backdoor) Roth IRA.
Keep 12 -24 months of living expenses in a high yield checking / savings account.
Put the rest of your investable assets in VT, IEMG and IEFA.
Don’t bother with individual stocks and don’t take any actions based on daily stock price swings.

I’ve been doing this for almost a couple decades. It is extremely simple advise, very hard to follow. Financially very rewarding and liberating. I am glad someone gave it to me in my 20s and I (reluctantly) actually listened!

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With your company stock at around 15% of your net worth, and having had a great run in recent years, I think it makes sense to take some profits off the table. Sell it all if you’re feeling risk averse about the market, sell half if you’re not. You’ll still be getting more equity regardless of your decision as part of your annual comp so it’s not like you’ll totally miss out on future company stock appreciation (plus things tend to go well for your job prospects if the company stock keeps doing super well).

What you do with the proceeds is up to you. You don’t mention your cash flow situation vs your disposable income, so it’s harder to say about your wishlist projects. If you’re pretty happy where you are living, a kitchen remodel could be a nice upgrade and the sooner that happens, the sooner you can start enjoying it. Boats are more expensive on an ongoing basis, so that might make financial sense to save for a bit later?

Paying down some of your mortgage is certainty a reasonable option. It’s not like banks pay 3% these days and most places in the Midwest you probably aren’t getting a big tax break on the mortgage anyway. Even if it doesn’t effect your monthly payment, it’s still earning you 3% on the future interest expense and you get that much closer to having no mortgage payment.

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Nooooo! First, don’t forget the capital gains tax. Second, it makes little sense to pay off a fixed 3% mortgage. Use the cash for your real estate investment instead.

I’m guessing you don’t have a whole lot of free time to enjoy that boat. You might want to figure out your priorities first.

It’s neither discretionary income nor your feelings that makes you wealthy. It’s your $1.16M net worth. Congratulations, you’re in the top 1-2% for your age group, and top 10% overall. 98% of your peers and 90% of everyone have less money than you. Just because you’re not living it up like the decamillionaires or billionaires (or billionaire-wannabes) on the teevee doesn’t mean you’re not wealthy.

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First…

BS is isn’t. Maybe you’re not ‘rich’ but you are relative to most.

To the question, : Yeah I agree with the others. Sell off half or all of that company stock. You’ve got too much of your money in that company. IN today’s economy especially you need to prepare for the possibility that the economy goes under (for real), your company crashes and the stock plummets, and then you get laid off. You’re doubly invested in your company between the pile of stock and your income from your job. If they stumble then you lose twice.
400%+ is a great run, time to take profit. Don’t be greedy and instead protect your gains.

I also would not be in a rush to pay off the home loan at 3% and instead use your cash or rental investments if you want to get into rentals. You can’t leverage rentals at 3%.

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Why are you guessing that? Did he say something about working lots or having a very high position?

People making >100k don’t really all that much more on average than median income earners. For those that do, 9hr a day vs 8hr isn’t that big a deal. My income is that level and I don’t work over 40hr Depends on the job of course.

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Yeah it depends. I am around $250k/yr total compensation including stock that vests and bonus, and I usually do 40hr weeks. But it can be worse - last summer was absolutely awful in that I was covering for my boss (and doing my job), so it meant getting in around 8am and leaving at 6:30 at times, plus responding to email at home… so putting in 11 hour days. Thankfully things are more sane right now.

In terms of discretionary investing… I am sitting on the sidelines until the next few months play themselves out. It is my view that stocks are too expensive right now relative to earnings and I think we are due for the second half of the ‘W’ in terms of coronavirus impact on the market. I know, never time the market… but these are unusual times.

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The rule of thumb for single stock exposure is 4%-5% of all funds you allocate to stocks. However:

When it comes to stock of the company that employs you, where you may have somewhat better visibility than an outsider would have, you can safely double that rule of thumb. But beyond 10% tops, you are on your own.

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Because unless you can actually work or live on that boat, and you need 8, 9, or 10 hours during the day to devote to your job, commute, and sustenance five days a week, there’s not much time left to enjoy that boat except on weekends. And I guess you have to really love boating and have no other obligations (like family) to use it every weekend. If you’re only going out once a month or less, is it worth the expense (initial expense + maintenance + storage)? I didn’t forbid OP from getting a boat, just to figure out whether it’s a priority.

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Thanks everyone for the input. I have read all of the comments and I very much appreciate them.

After thinking about it further, I am going to sell off about $150k worth of the company stock, and use that with $40k of my cash to pay off my mortgage. This will leave me with $10k cash leftover, which is sufficient when I no longer have a mortgage to pay.

Here’s my exit strategy. I’m going to sell off about half of what I need in the next trading window, and the other half in the trading window 3 months after. The reason is because by that time a very large chunk of what I own will transition to long-term capital gains, saving me about $10k in taxes. This $10k will pay for a boat :slight_smile:

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If you’re still participating in ESPP or something of the sort, watch out for a wash sale. And don’t forget about capital gains tax, even if it is long term. 150K worth of company stock plus 40K cash won’t give you 190K after tax to pay off the mortgage…

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Thanks and I am mindful of it. Since the original post, the value increased by $15k. I will also vest additional shares in both August and November. My plan is to sell off any shares that were newly vested, therefore no capital gains or fall into long-term capital gains taxes. This will help minimize my tax bill, and with the money saved from not having to make mortgage payments, I should have this money together.

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When it comes to stock of the company that employs you, where you may have somewhat better visibility than an outsider would have, you can safely double that rule of thumb. But beyond 10% tops, you are on your own.

Umm no. As an employee you have no additional insight into what is happening at your company.

Enron
Worldcom
Lehman Brothers
Bear Stearns
Lucent / Bell Laboratories
Kodak
Nortel Networks
Blackberry

All of them too big to fail. All gone. Different reasons.

If/when your company collapses and you lose your job, you don’t also need to lose all your savings.
Sell it the day you get it.

Of course, it is a different matter if you are an insider. You would need a 10b5-1 plan if you were one.

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Maybe if you’re not paying attention. You can definitely have some insight that doesn’t rise to the level of material nonpublic information to require planned and disclosed stock trades. You could definitely have a better understanding of the current challenges and risks faced by your business for example.

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You can definitely have some insight that doesn’t rise to the level of material nonpublic information

One could have plenty of insight, but most people don’t act on any of it. I know people from 3 of the companies I listed above who lost a lot - in one case 7 figures (!), because they didn’t believe their employer (always special to the employee) would go down the drain.

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Isn’t it great when people come back and share updates?

The stock price was a bit depressed during my Q3 trading window, so I didn’t do much. I ended up cashing out a good portion of my company stock a few weeks back though. Even after cashing out and paying off the mortgage, I am still left with >$100k in my company stock.

I ended up picking the kitchen remodel over the boat. I basically burned up my cash on it. I am over $30k into it, and there is no end in sight. The boat will have to wait until after I pay for my 2020 taxes.

I will be in a position to cash out additional stocks in Q2 2021 and purchase my first rental property.

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Yes, it is!

You could have bought your first rental now instead of paying off the mortgage. You probably could have bought more than one.

But I suppose it’s all good as long as the boat remains on your wish list (and not in your dock) :smile:

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Do you find contractors you like/ trust before buying your rental? Most aggravating things so far with my own house (not a rental) is finding contractors.

Guess that’s the same with past car repairs, too.

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Ask your neighbors, nextdoor, real estate agent, Zillow, Yelp. Youtube is great for DIY easy things. I found a few decent people (carpenters, handymen, plumbers) on nextdoor – they live nearby so it’s in their self-interest to do good work at a reasonable price. Haven’t had to look for a “general contractor” yet.

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