RSUs in your investment portfolio

If you receive a large grant of RSUs or company stock, you will have many risks. Risk of termination before vesting, risk of market volatility in stock price, and asset concentration are a few. You will need to decide whether you will keep the stock once vested, or if you prefer to sell the stock at vesting date.
Concentrated Positions
A concentrated position occurs when you have a large amount of your finances wrapped up in one company. This can cause problems by increasing risk in your portfolio, causing tax issues, and liquidity needs. These risks compound if you have a long time horizon for your investment or your tolerance for risk in your financial plan is different.
Holding onto your company stock can leave you very dependent on one company’s success.
Chances are your salary, your 401(k) match, and your stock compensation are all tied to one company. This one company can ‘make or break’ your future financial freedom based on how well they do.
 
Example: If a competing product comes out, this may drop your stock value and require lay-offs longer term. Many smaller tech companies realize this pain when Amazon or Google announce a competing tool. The stock can plummet by 50% within a week.
Example: If a company ends up like Enron or WorldCom, then the drop may even be worse – wiping out your earnings and stock value completely. It may be hard to think this could be your company when we tend to be overconfident when we have an insider perspective on our employer’s prospects.
 
In these price drop scenarios, you may have paid significant taxes on the vested stock already as well.
On the flip side, if you hold on to the shares and the company goes gangbusters, you may also have significant capital gains accruing. Selling the entire position may not be tax-efficient and cause you a different headache.
Diversification
Holding a large position in one company stock exposes you to higher risk of large movements in the stock price from day to day. Diversification is used to help investors choose a portfolio that offers the best return for a given level of risk. Why take on more risk than is necessary to achieve a given level of return?
A diversified portfolio is based on academic research into the disciplines of economics and finance. Research holds that investing in many different asset classes (i.e. emerging markets, U.S. large cap funds, etc) and in many companies within an asset class will reduce your investment risk. This seeks to avoid damaging investment performance by the poor performance of a single company stock or asset class.
 
At SeedSafe Financial we practice diversification for long term success.  Find out more about our investment management services and consider giving us a call.
 
Find out how diversified your portfolio is through our free online tool.
 

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The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.
If you live in a state with it’s own form of state AMT, this further complicates the matter. AMT calculations can be difficult and you may need professional help, such as that of an accountant, tax attorney, or someone experienced in complex tax returns.

Top 5 Ways to Prepare for Buying a Home

Amazon recently announced their search for a second headquarters and it got me thinking about buying a home.

The thought of 50,000 new employees in one campus location will definitely spur new home buyers.  Seattle has exploded from the number of mid-westerners and Californians moving to the state for work.  Prices are continuing to rise and for most of us, this may create a panic to buy (FOMO around prices) or anxiety around buying a home.

So how can you make this daunting task a little better? Prepare, prepare, prepare.  Don’t be forced into a rushed situation and know your needs ahead of time.  As they say..

Preparation + Opportunity = Luck

When to Buy

Why am I writing a post on buying a home after Labor Day?  Because buying a home when others are too busy is a great time!

You may not always have a choice on timing, but if you find yourself waiting for a good deal then November to January is a great time to make an offer.  With the holidays and school starting, many families may be busy and buyers can be a little scarce.

In a seller’s market, buying in the off-season may mean more bargaining power.

How to Prepare to Buy

1.  Identify a lender or two you are interested in working with.  These may be credit unions in the area, your current bank, or a referral.

2.  Decide if you need a pre-qualification letter or a pre-approval letter.  Nuanced differences – I know!

Pre-qualification is a step before pre-approval.  This is where you can give a lender an idea of your current status without verification with documents and a hard credit inquiry.  This will give you a general idea of what you can be approved for without dinging your credit

3.  Check out your credit score to make sure everything looks right and no errors exist.  A great site for checking this is Credit Karma.

If you are close to a credit score cut off point (i.e. excellent credit vs good credit) then the rates available to you may change.  Take a look at what is affecting your credit score.  Determine if it makes sense to pay down some of your debt or wait for one of the hard inquiries to fall off your credit report.

4.  Know some of your numbers:

  • If you are renting, what will it cost to end your lease early?
  • What size house are you looking for?

If the loan is considered a ‘jumbo loan‘ then lenders may require you to meet more hurdles.

  • Will you put down 20% of the purchase price?

This will mitigate paying primary mortgage insurance on top of your monthly payment for the loan.

  • What is your housing expense ratio?  Lenders generally look for your expenses to be below 30%.

Calculate an estimate:  Annual salary x 0.28 / 12

Will your mortgage payment, insurance, taxes, and HOA fees be below this amount?

  • What is your debt to income ratio?  Lenders generally look for your debt payments to be below 40%.

Calculate an estimate:  Annual salary x 0.36 / 12  Will your debt payments be below this amount?  This generally includes student loans, car loans, minimum credit card payments, child support/alimony, and other required monthly obligations.

5.  When you are ready to buy a home in the next 60 to 90 days, get your pre-approval letter.  Find out when the pre-approval letter will expire.  When the pre-approval letter expires, more documentations and another hard credit inquiry may be required.

So what do you think?  What other tips for buying a home do you have to share?  

When you are ready to chat with someone about how buying a home fits into your long term financial future, schedule a consultation with me!

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The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.