Sizing Up Your Concentrated Position with a Financial Plan

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If you work or have worked at a tech company, you’ve likely accrued equity as part of your compensation.

Your stock benefits are a powerful tool for building wealth, and can potentially end up making you more money in the long run than your lifetime salary. However, those returns come with a catch: if you’ve accrued a lot of company stock over the years, you likely find yourself with a concentrated position.

If you’ve amassed a great deal of equity in the company you work for, this usually means you have a concentrated position; you hold one asset that represents a large percentage of your net worth. If you keep your entire position and the stock continues to do well, you will enjoy even greater gains – but hefty losses could be life-altering. How do you continue to enjoy the fruits of your labors without exposing yourself to too much risk?

As is the case with most of life’s choices, it helps to make a plan.  

What is a Financial Plan?

A Financial plan is a comprehensive evaluation of an individual’s current financial state, the recognition of goals for the future, and a strategic outline of how to get there. A financial plan uses current information, such as your income, assets and their expected growth, in an effort to predict your future cash flows, asset values and withdrawal plans.

A financial plan can help put your concentrated stock position into context by demonstrating the impact that price fluctuations can have on your total wealth. By defining your financial goals and the influence your concentrated position has on them, you’ll make informed decisions about how to better secure the future you want.

As with any plan, you need to define a desired aim. What is it that you want to achieve? Is it the capital and financial security to start your own company, or to retire early? Maybe you want to travel more or simply make more time for your family. Whatever your destination may be, a financial plan provides the road map to get there. The key to a successful plan is in combining all relevant pieces to maximize your chance of achievement. 

Putting the Pieces Together

You can think of your finances as a soccer team; each player has a role to fill. Your “players” are of course a bit different; from simple things like a weekly budget to keep you on track, to the best way to balance risk and returns according to where you are in your financial journey. The bottom line is that every element, big and small, should contribute to your success.

Great teams always harness the synergy of all players to achieve exceptional results. This means taking an intentional look at what each can contribute, and how these factors can best combine to hit their mark. Everyone has a role, and everyone shares a goal. When it comes to your finances, the same principles apply.  

Success in any realm, from soccer to stock options, rarely happens by accident. It helps to set concrete goals and develop a strategy to achieve them. 

Building your Plan

To understand how you’ll meet your goal(s), start by reviewing your assets, debts, expenses and projected cash flows. Then, consider your lifestyle goals to estimate the amount of assets you will need in the future. Reviewing your current investment allocations can help you to understand how your concentrated position may affect your current or future lifestyle.

For example, if you determine that you will need $5 million in investment assets at retirement, and your concentrated stock position is worth $10 million, then you know that you can lock in your goal by selling half of your position. The other half of the position will maintain all of the upside potential, while limiting your downside.

When assessing a concentrated position, it is essential to know how much you’re willing to lose. Additional upside usually has less of an impact on lifestyle than downside risk. A doubling in your net worth from $10 to $20 million, while exciting, would likely be less life-altering than a halving to $5 million. It is important to see the potential impact of each scenario and be comfortable with the level of risk you’re taking on.

The First Step: Start!

There’s a familiar saying: “the first step is to start”. You don’t have to map your entire financial future in an afternoon, but you can start to consider where you want to be, and how to maximize your odds of getting there. You’ve made great choices that led to this concentrated position — now it’s time to play that strong hand as well as you can.

When you’re ready to take the first step toward a more secure, profitable future, you can check out our guide: “Programming your Financial Future”

Posted By: Alison Rambaldini