The Faulty Tyranny of Logic
How many money decisions have you made based on emotion, not logic? More than a few? Me too. Take a moment of self reflection: how often do you think you act rationally when making money decisions? You may think you are being logical, but chances are…you are not.
I want to share a few anecdotes from responses to my RSU articles posted over the past few weeks.
Emotional, Not Logical Responses
First, I had a conversation with a very good friend who has a large portion of her compensation paid in RSUs. She said that upon grant, she tells herself once they vest, she will sell the shares immediately because she has a lot riding on her job and she should lower the risk in her portfolio. This is sound logic. However, by the time the shares vest, they are below the grant price which bothers her so she doesn’t sell.
“It seems like I am granted shares near the 52 week high, and when they vest, the share price is near the 52 week low.” She confessed that she hangs onto the shares longer than she should with the hope that they will increase in value. Sadly, this isn’t a sound solution.
The straightforward solution to this dilemma can be explained with an illustration. Suppose you have an RSU vest that is worth $50,000. The best question to ask yourself is, if you had that amount of cash lying around, would you buy $50,000 of your company shares? Your rational answer tells you what you should do with your vested RSUs.
Sound Judgment Would Have Helped
A friend of a friend reached out to me with a heartbreaking story. He received a large part of his compensation in vested shares from RSU grants. The stock generated an amazing return when he was granted his RSUs. He told me about his rationale. He was going to sell the vested shares when the stock price got to $80, just $2 higher from where the RSUs vested. The $80 price was an anchor. The shares never reached $80 and now trade at $15. His shares were worth $1,700,000 and now they are worth $200,000. He lost $1,500,000!
We are speaking next week about his feelings and equity compensation situation and about how I can help him. He is struggling to accept the loss (he is still holding out for $80!) and embrace the benefits of diversification for achieving his financial goals.
Finally, an avid reader of my newsletter told me that, “I got hammered on my Netflix shares last week. What should I do?” His shares are a product of vested RSUs. The stock has continually gone up in price for about 10 years, which makes it very hard to sell. A lot of times employees think that by working there they know what the company is worth, how it works, and that things will only improve. Unfortunately, that doesn’t happen all the time. Netflix share performance in 2022 has been abysmal.
The rational way to ensure that you sell the shares is to commit to selling them before they vest. This way you are locked into selling and can avoid costly mistakes.
Emotional Rescue
RSUs are a large part of compensation packages and cause a lot of stress because they are complicated and emotional. Most people don’t think about them logically. More importantly, the RSUs are your hard-earned money and there is a strong emotional attachment to them because you spent your time toiling for those wages.
Whether based on logic, emotion, or another psychological factor, there are many RSU questions. I can be your objective guide on your money journey and help you make less emotionally charged decisions. Feel free to set up a free consultation.