It has been a rocky start to the year for investors. Inflation in most developed markets is coming in at multi decade highs, suggesting interest rate rises are on their way. In emerging markets, there has been less appetite to wait and see if inflation passes, with central banks ruthlessly increasing rates to counter inflation. Then there’s a potential war. While Russia menaces Ukraine, the US warns against it and Europe frets about their energy supply, much of which comes from Russia.

It has seen markets beaten around, but those in a diversified portfolio have seen declines in the mid-single digits. One index has been hit harder than most. The NASDAQ 100 in the US. With a lot of tech themed companies within that 100, it’s seen a 15% decline in the first 7 weeks of the year. And for all the talk about potential crashes, take a look at some of these declines. PayPal down 46%, Netflix down 35%, Zoom down 31% Tesla down almost 30%. Right now, the market isn’t in the mood to indulge underwhelming earnings reports.

Then there’s Meta or Facebook (we’ll refer to it as Facebook for the purposes of this article). Facebook has been the largest (by market cap) to be sold off viciously, down 39% for the year (as of writing). Facebook is still making plenty of money, but it has a lot of concerns around it. Regulatory issues keep following it, while there’s the other question – is it even cool anymore? Remember myspace? But as Bloomberg notes, it is a noteworthy fall.

The shares are coming off their lowest close since May 2020, and are down more than 45% from a September peak, a decline that’s unmatched among big U.S. tech stocks in recent years. The slump has pushed Meta out of the top 10 of largest global companies by market value, yet also left it trading at its cheapest on record.

Sure, this is all fairly mundane news. Stocks go up, stocks go down. Dominant companies don’t always stay dominant because there are always competitors and challenges ahead.

On an individual level for investors in these companies, this is big news. Some large individual holders in these companies are often employees of the companies. For them, these declines are something of a nightmare. Many of them take compensation packages with stock options, restricted stock, or in the case of Facebook a restricted stock unit (RSU) that pays out in stock over a predetermined schedule.

With stock options, you have to pay to access the stock. All have different tax treatments and can be taxed at various times, some resulting in large tax bills. In the past sometimes those tax bills came due on stock prices that had fallen, as notably happened in the early 2000’s tech wreck.

Former Cisco engineer Jeffrey Chou, 32, owes $2.5 million in taxes on company stock he purchased last year that has since withered in value. Chou figures that if he were to sell everything he owns, including the three-bedroom townhouse that he shares with his wife and 8-month-old daughter, the family still could not pay the bill.

“There was this feeling of ‘hold on to it for the long term,’ ” said Marilynn Goldberg, an unemployed executive recruiter who faces a $500,000 tax bill from Portal Software Inc. stock she purchased using options last year; the stock has fallen more than 80% since then. “You have to remember, it’s a new phenomenon. A lot of the people [using options] had never had them before.

Some of these calamities are avoided with the use of RSUs, which may offer a dollar value and the tax is withheld at payment time by the company. They’re also avoided by the fact that until recently there haven’t been massive falls in company stock prices related to sector sentiment that have been a concern for those receiving options or stocks.

The employees in many of these companies are well compensated with salaries and the stock is an extra sweetener, so there’s rarely many tears for them, but the admission from Marilynn Goldberg hits the nail on the head of the major issue here. They’re concentrating their wealth based on feelings, which is a behavioural issue. The feeling of holding for the long term is the assumption there will be growth, good times will roll on for the company, and it’s the loyal thing to do as an employee.

This thinking is a potential planning headache. Investors generally want some assurances of certainty when they’re planning for the future. Cash is the only surety there is, and that’s short term. Cash means someone has certainty around their short term spending, but beyond that there is no certainty. In the absence of certainty, investors can take leaps of faith. When things are good that means having faith that things will continue as they are, until they don’t.

Many employees taking options or stock have certainly been rewarded handsomely with life changing sums of wealth, but there is the other side of the coin. When someone has the majority of their wealth tied up in something that can fall 40% in a few weeks, it means their expectations and lives can potentially change in those few weeks.

Pondering an early retirement or time out of the workforce based on that wealth? Think again. Planning to have a family or have one partner reduce their working hours based on that wealth? Think again. Buying a new house or doing major renovations based on that wealth. Think again.

For the companies it’s also a double-edged sword. As stock prices charge higher, they have employees with a stake in the company who are likely feeling euphoric, motivated, and happy at work. When the stock price falls significantly, they have employees feeling the same feedback loop in reverse, they’re likely anxious and distracted at work. Something that doesn’t help a company trying to right the ship.

This prompts the question of how to invest and how to plan when someone is overweight in their employer’s stock (or any stock in general) and it comprises a large amount of their net worth.

The wealth needs to be weighed in context of everything else that’s occurring in their life and against the rest of their finances. Acknowledging greed and where a company might be in its growth cycle is also important. For a company like Facebook, which grew to a market cap over a trillion dollars and become one of the ten largest in the world, that may be a reason to trim exposure. Having clear goals and being disciplined about selling stock when money is required is much better than saying “let’s see if it keeps going up”.

Having an overweight position may be fine, but not so overweight that fluctuations affect someone’s performance at work, their mental state, or their life plans.

It might be easy to hypothetically say “oh well if I had $2 million in stock and it halved, I’d still have $1 million”. We’d suggest the focus would most definitely be on the $1 million lost, not the $1 million left because the whole $2 million would have been mentally accounted for going forward. Losing it would be mentally catastrophic.

This may be a dream for many of us, but occasionally some of us speculate and have some success or we know someone who has been compensated handsomely with company equity. It’s important to remember, winners don’t always stay winners. Such risks are ideally acknowledged early and controlled rigorously.

Shared with permission of our licensee FYG Planners and friends at Mancell Group.

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