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For high earners, there is still a way to leverage the potential of tax-free earnings. Writing this last year, I was not ready to publish it. Thanks to the bickering of our extremely productive members of federal government, it was … Continue reading
In our last investment income article we talked about how you might use your newly found income to fund hobbies or other enjoyable pursuits that might also bring you some return or help you improve the value of property … Continue reading
If our first post on investment income inspired you to think of all the great things you could buy with some extra income, that’s great. If it inspired you to think of the things you could do that might increase your wealth while having a little bit of fun, you’re on the right path.
Next week we’ll look at some options for using income designed more specifically to build wealth, but for now let’s think about some smart ways that you might ‘spend’ investment income. We hinted at this in the end of The Value of Investment Income Part I, but there are a lot of “outside the box” ways you might have fun with while still maintaining, diversifying, and possibly building your wealth. Some of these may be adding to existing assets, hobbies and other fun pursuits, or possibly building a collection of something valuable.
Previously, our example of models and action figures may have sounded like a stretch, but is it really? Collectors of items like these, as well as things like sports memorabilia, comics, and antiques would say No. Although collectible markets can be tricky and each requires the collector to do his research, find trusted sources and negotiate prices, they can be pretty lucrative hobbies. As with any investment I wouldn’t recommend sinking everything you own into a collection. But, for the wine enthusiast collecting classic Bordeaux, the car enthusiast building up a collection (or restorations) of hot rods, or the art-lover acquiring coveted paintings, enjoying the search and selection process of these fringe investments can make them doubly rewarding.
Maybe collectibles aren’t your thing. Maybe you like to create? Assuming the figures from Part I, what could you create with an extra $1,388/month. Maybe instead of buying art, you like to express your own artistic talents. Painting, designing, and building are activities that tend to provide stress relief and can produce things that bring more income or simply offset costs. Some people create art only for themselves, later to find that other people are willing to pay for it.
This author personally had a blast using some spare time to build a piece of furniture and later sold it for almost three times the cost, after two years of use. It won’t happen every time, but if nothing else you have created something that you enjoy or find useful, and something tangible.
Alternatively, you could put extra income towards increasing the value of assets you already own. The most obvious one that comes to mind is a first home. We’ll place this here, instead of the next segment on investing income, because for most people a residence is not an investment (we’ll look at those numbers another time). There are two main ways to increase your equity in a home. The first one, although it may be limited by prepayment clauses, is to make extra payments towards your principal. This will build equity in your home and reduce your interest costs over the long run. Another way to build equity in a home is simply to make improvements. You may not get back everything you put in, dollar for dollar, but if you make the right improvements you can increase your home’s resale value or possibly improve the utility you receive from it. For example, using extra income to finance an add-on can be a great alternative to searching for a larger home with a bigger mortgage.
If you are open to using part of your extra income for things that may pay off in more ways than one, using non-traditional investments, some of these ideas may be for you. This certainly isn’t an exhaustive list, but get creative, do the numbers (get someone to help you review them if you need it) and get started. If you’re thinking more along the lines of using extra income for a business venture or an investment, tune in to Part III in two weeks.
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If I were to offer you the option of owning either:
a) an investment designed purely to grow in value over the course of 30 years, OR
b) an investment designed to provide you with regular monthly income over those same 30 years…
What would you choose?
Of course, in order to decide you would need to know all the specifics and variables affecting each investment. What are the risks of each? What are the different tax treatments? For the purpose of this article we’ll set all those aside and assume that, pre-tax, both of these investments are the same in all regards except for:
- one increases in value by $500,000 over the course of 30 years, in today’s dollars.
- the other pays $500,000 in total income over that time span and maintains value, all in today’s dollars.
So, which will it be?
First, why do we care? It is the same amount of money. We pose this question because traditional saving and retirement planning often ignores the benefits of receiving extra income from a passive investment, particularly in the early years of wealth accumulation. Speculation and growth tend to be thought of as tools for the early decades of saving, with income-producing instruments being relegated to the later years of accumulation and distribution (retirement).
What if you received investment income during all those years? What could you do with an extra $16,666.67 in income each year? In the next installment we’ll look at a few creative uses for the extra income, but for now we’ll consider the use that probably came to mind first for most readers. Spend it. Disclaimer: we don’t advocate this, but let’s take a look.
Here we get to see how these two amounts, the same in today’s dollars, affect buying power differently. With a given regular rate of inflation, the dollars you spend now will get you more than they will in 30 years. $16K will hypothetically get you much more now than 30 years in the future, so having it to spend now might not be so bad after all. You could blow it all by taking three really great vacations. Eat out frequently, give it to charity, lease a fancy car, do whatever you want. Collect models and action figures if that’s your thing.
With that last one, I’m getting dangerously close to talking about the topic of Part II, so I’ll stop there. Stay tuned! (if you wish to be notified of the next installment, you can follow our Facebook page or using the button on our footer).
A shared goal, a stronger relationship.
Why are more and more financial advisors fee-based? It comes down to philosophy. Advisors are increasingly choosing a business model that promotes a trusted, ongoing relationship with a client, rather than just a sale.
Would you rather meet with an advisor, or a salesman? A fee-based advisor has every motivation to be your financial consultant and help you manage the investments you have chosen. Does a transaction-based advisor have similar motivation?
The transaction-based business model is built on selling you a product. When a client buys an investment, the broker gets paid a commission upfront. So this model inherently encourages an investment broker to hunt down the next sale. What if you don’t buy any more investment products? Will the broker still stick around and financially consult you for years to come? Maybe – but that’s not what the business model is about.
My interests are aligned with yours. The fee-based business model focuses on a relationship – the ongoing supervision of the client’s assets under management (AUM), with part of the advisory fees dependent on the performance of those assets.
In the fee-based business model, when you do well, the advisor does well. This encourages a sense of partnership and collaboration in planning your financial future, as opposed to just selling you an investment product here and now.
As a fee-based advisor, I have the same goal you have – the goal of growing your assets. We both succeed when that happens.
In the bear market downturn, as the value of client assets declined, so did advisor fees: financial advisors lost some of their own personal wealth and income.
I feel fee-based is better. I offer my clients the option of a fee-based relationship because I feel better about advising them in this way. My conscience and my ethics have guided me toward this business model – and through it, I can provide what I believe to be better guidance for my clients. Victor Larsen is a Representative with WFG Advisers LP and may be reached at http://larsenfm.com (210) 340-2109 or vic@larsenfm.com
These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.
Four Financial Areas to Address in Every Job Transition
While the weeks following your separation from an employer may be hectic and you may be preoccupied, this is also makes it more important to be aware of the things you need to do. You may be preoccupied with a new job, a move, a job search or any combination of those, but your finances need a little attention at this time too.
1. Budget – Although it’s a great idea to take a week of “me” time and regroup, going on a celebratory spending spree to ring in your new found freedom from your boss probably isn’t the best idea. If you can afford it, go on a reasonably priced vacation where you can relax and reset, and come back ready to tackle whatever is ahead of you.
Hopefully you left voluntarily for another job, but unfortunately in this economy that isn’t always the case. Regardless of your future income outlook, this is a great time to look at your monthly budget to see where you’re at and where you need to be. If you haven’t been following a budget, this could reveal some spending habits you weren’t even aware of. Even if you have been keeping a budget you may need to adjust it, especially if you’re going to be on a job search. If you have lost your income, you really can’t get too conservative here. Trim whatever fat you can and it could save you some serious stress down the road.
Contrary to popular belief, if you’re moving to a position that pays you more it doesn’t mean you need to bump up your lifestyle to meet with your new income. If you were comfortable before, don’t change anything. Save the additional money and work on getting it to work for you in some way.
2. Retirement Accounts – You have a few options for what to do with your 401k savings when you leave your employer. Withdrawing it and catching the first flight to Vegas when you get the check may sound like fun, and it is an option, though probably not the best.
Whatever you do there is one thing you want to keep in mind. Anytime you take a withdraw or distribution from your 401k account you only have 60 days to get that money back in a retirement account to avoid paying income tax (and a 10% penalty if you’re under 59.5 years old).
That said you can do one of three things:
The other two options involve rollovers, and have various benefits and drawbacks to consider.
2. Roll over with your new employer. If you have a new employer that offers a 401k you will have the option to roll your previous 401k in to that one once it is set up.
Advantages:
Disadvantages:
3. Roll over into an IRA. There are many low cost options out there, from self-directed discount brokerage accounts to fee-only advisory accounts. Advantages:
Disadvantages:
3. Company stock – If you have a substantial amount company stock, you might want to reduce your exposure to that company if possible. What you are able to do can be affected by many factors related to your company, plan type, share type, issue/purchase date and more. You will want to consult your financial adviser and CPA on exactly what to do with your shares to avoid any negative tax consequences while diversifying your holdings.
4. Insurance – Healthcare is one of the greatest benefits of having a corporate job. Your insurance coverage will terminate on the same day your employment terminates, and you will have a certain amount of time to elect COBRA coverage. COBRA coverage allows you to keep your current group insurance for a period of time, with the stipulation that you will now have to pay for the full cost of the coverage. Luckily for you, the current administration has extended an offer to help you pay 70?% of your COBRA coverage, keeping your health care costs similar to those under your employer. I suggest you consult whatever documents your employer gives you and also find the current information on the Department of Labor Website.
In addition to healthcare considerations, this is also a good time to to take a look at your life insurance and disability insurance. It’s never fun to think about, but chances are you had a little peace of mind from whatever coverage your employer provided. There are a couple of reasons you may want to re-evaluate here:
This is not an exhaustive list, but we hope we have addressed some of the main questions people come across when in an employment transition. Please consult with your financial adviser to help you figure out specifically what is best for your situation.
Another downturn? Or something much less severe?
If Greece leaves the eurozone in the coming months, what kind of financial ripples could reach America?
Nobody can predict the endgame yet; Greece may even stay in the euro, although that is looking less and less likely. The big concern isn’t what happens in Greece – it is about what could happen in Spain or Italy as a result of what happens in Greece.
The effects from a Greek default (and eurozone exit) would likely be felt on four fronts in America – but first, an economic chain reaction would almost certainly play out in Europe.
A Greek default could imperil Spain & Italy. If Greece leaves the euro, then Greek bondholders lose their money. A crisis of confidence in the euro could prompt institutional investors to either walk away or demand even higher interest rates on Italian and Spanish bonds. The European Central Bank could then step up and provide emergency lending, bond buying and recapitalization efforts. If those efforts were to fall short, the worst-case scenario would be a default in Italy and/or Spain.
It could also hurt U.S. banks that aren’t sensibly hedged. If Italy and/or Spain default, a severe downturn could hit EU economies and U.S. lenders would be looking at a huge potential problem. If they are capably hedged against the turmoil in the EU, they could possibly ride through it without a lot of damage. If it turns out they have made foolishly speculative bets (cf. Lehman Brothers, JPMorgan), you could have a big wave of fear, which in the worst scenario would foster a credit freeze reminiscent of 2008. Would the Fed step in again to unfreeze things? Presumably so. Without its intervention, you could have a Darwinian scenario play out in the U.S. banking sector, and few economists and investors would see benefit in that.
The good news (relatively speaking) is that U.S. banks have cut their exposure to Greece by more than 40% as that country’s sovereign debt crisis has unfolded. Pension funds and insurers have joined them.1
Stocks could fall sharply & the dollar could soar. The greenback would become a premier “safe haven” if foreign investors lose faith in the euro. At the same time, a crisis of confidence would imply big losses for equities (and by extension, the retirement savings accounts and portfolios of retail investors).
U.S. companies could be hurt by fewer exports to Europe. Right now, 19% of U.S. exports are shipped to EU nations. If a deep EU recession occurs, demand presumably lessens for those exports and that would hurt our factories. If institutional investors run from the euro, it would also make U.S. exports more costly for Europeans. Additionally, the EU is the top trading partner to both the U.S. and China; as Deutsche Bank notes, the EU accounts for 25% of global trade.2
Our recovery could be hindered. Picture higher gas prices, a markedly lower Dow, the jobless rate increasing again. In other words: a double dip.
In mid-May, economists polled by Reuters forecast 2.3% growth for the U.S. economy in 2012 and 2.4% growth in 2013. These economists also believe that were the fate of Greece not on the table, U.S. GDP might prove to be .1-.5% higher.2
If politicians play their cards right, we may see better outcomes. For example, Greece could elect a new government that decides to abide by the requested austerity cuts linked to EU/IMF bailout money. Greece could remain in the EU and banks in Spain, Italy, Germany and France could ride through the storm thanks to sufficient capital injections. Global stocks would be pressured, but maybe on the level of 2011 rather than 2008. (Maybe the impact wouldn’t even be that bad.)
In a rockier storyline, Greece becomes the brat of the EU – a newly radical government rejects the bailout terms set by the EU and IMF, Greece leaves the EU and starts printing drachmas again. The EU, IMF and maybe even the Federal Reserve act rapidly to stabilize the EU banking sector. Early firefighting by central banks results in containment of the crisis after several days of shock, with U.S. markets recovering in decent time (yet with investors still nervous about Italy and Spain).
Containment may be the key. If a Greek default can be averted or made orderly by the EU and the IMF, then the impact on Wall Street may not be as major as some analysts fear – and who knows, the U.S. markets might even end up pricing it in. Greece only represents 2% of eurozone GDP; our exports and credit exposure to Greece are minimal at this juncture. Our money market funds have mostly stopped investing in Europe. So with diplomacy and contingency planning afoot, a “Grexit” might do less damage to the world economy than some analysts believe.2
Daniel Larsen may be reached at (512) 487-7790 or dan@larsenfm.com
This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. Marketing Library.Net Inc. is not affiliated with any broker or brokerage firm that may be providing this information to you. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or a recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Citations.
1 – www.csmonitor.com/USA/Latest-News-Wires/2012/0514/Greece-s-economic-woes-may-hurt-US [5/14/12]
2 – www.cnbc.com/id/47562567 [5/25/12]
If Jeremy Lin could teach you how to retire early, would you listen? I’m not typically prone to jumping on bandwagons, but recently emerging basketball phenom can teach us a few things about preparing for our financial futures.
Work with what you have, and make the best of it.
Jeremy Lin wasn’t drafted out of college, and even after signing a contract ended up playing in the D-League (farm league for b-ball). Despite his strong performance in the D-League he was repeatedly sent back. Many transfers and waivers later, he ended up in the D-League once again, playing not for the New York Knicks but for their D team the Erie Bayhawks. Days before being let go again, the First Tawainese American NBA player was still staying on his brother’s couch. He showed up once again and finally got the chance to really change his future. Things fell in to place but never would have if he had made excuses to not make the best of his situation.
Although at times he was cited for demonstrating self-doubt (even humility can be disguised for that in the NBA) he never let it stop him from going after his goals.
Too often I hear people say things like, “I don’t have enough money to get started with financial planning” or “I don’t even know what I need to do to save for retirement”…”I feel like the odds are stacked against me.” Well, guess what? These excuses will get you nowhere, and you’ll be using them again in ten years when the odds really are more stacked against you. No matter how behind or how unprepared you are, it won’t likely improve if you just shrug it off as hopeless. And if things are going just OK, why not develop a financial plan to really work towards reaching your goals sooner?
Recognize your strengths and weaknesses and act accordingly.
After Harvard, following the NBA tryouts, Lin acknowledged that the workouts were “one on one or two on two or three on three, and that’s not where I excel. I’ve never played basketball like that.” Lin realized that his style of play wasn’t suited to a two man team and that he would have to put in the hard time playing on as many teams as it took to prove himself as a valuable asset and get to the right place in his career.
Maybe you have no interest in investments, maybe you don’t think you could ever figure out a savings plan, or maybe you are just more interested in spending your time working on something else. There is nothing wrong with admitting what you aren’t great at (or don’t want to deal with) and focusing on the financial areas you may excel in. Maybe you’re really good at finding ways to bring in extra income through hobbies or side projects. Maybe there is somewhere at work that you can put on a full court press and bring home more money every year. It may not be traditional financial planning, but if you can leave that to someone else and do something else that increases your personal bottom line, you’re shooting for a three – which brings us to one final observation.
Discover the Lin’s in Your Life, and Look For New Lin’s if Needed.
Just as recognizing your own strengths and working on them can improve your financial planning outlook, so can identifying the strengths of others in your life and make sure you have a good team working for you. It was actually Carmelo Anthony who recognized Lin wasn’t being used to his potential and suggested he get a little bit more prime time on the court. While it took a little bit of luck, recognizing an underutilized player has changed the future of the Knicks’ organization.
Maybe you own a business and have employees who aren’t living up to their potential, or maybe you’re not sure. It’s time to find out, and put them where they need to be to produce the greatest outcome. Maybe you are having your tax accountant or an insurance agent handle your retirement and make your investments, something best delegated to someone who specializes in that. Maybe you’re working hard at taking care of certain work or financial tasks that are not your strong suit, when your time would best be spent elsewhere while someone specialized to that task rocks it.
However good or bad your financial circumstances, make the determination not to be limited by your by them, focus on your strengths, and delegate other tasks to the right team members in your life. Jeremy Lin and the Knicks did, and it finally paid off.
When you talk about spending, budgeting, and planning for the future, where does the conversation usually end up? It goes without saying that it will probably take a different path depending on who it’s with. This conversation with a friend will probably be more light-hearted than if it’s with a parent or child or your significant other. As a financial planner I get lumped in to a whole different category, it would seem. I would have to be blind not to notice the way many people cringe the first time they’re asked about their spending habits.
I’m just going to go out on a limb here and hypothesize that nine times out of ten, people shy away from this topic because they are ashamed of their spending. This is based on the relaxed happiness I see in response to the same question from those who have made a plan and stuck to it. It’s very common for people to spend when they know they shouldn’t and on things they don’t even want or need. Then, in the same manner in which my dog tries to hide from sight after she climbs off the couch at the sound of my entry, we try to conceal, forget or rationalize our spending habits. “What $5 latte? I don’t see a $200/month coffee habit…where?”
Instead of simply saying stop, I would like to propose that you start. In order to get on the right track and stop feeling shame about your spending, begin with a value based approach. The following instructions assume that you are at least aware of what you spend your money on so I highly recommend you begin tracking that. Then – Start:
-Prioritizing your life. Take the dollars and cents out of it for a minute and evaluate what is really important to you. What makes you happy and what can you do without? Some of the things you spend money on may even be limiting your potential and taking time and energy away from things you enjoy more!
-Cut out the things you don’t need or want, and spend a little more even (Yes, I said it) on the things that really matter to you. Chances are, you’ll be able to cut more out than you need to spend on the stuff you love doing, and therein lies savings!
-Having someone keep you accountable for your spending and saving. Spouses can be good for this, but that arrangement can also turn in to a source of friction. Your financial consultant or at least a friend who doesn’t share your bad habits could help you realize when things are out of whack. Your financial planner can also help you find ways to save more on the things you do spend on and keep that savings, which brings me to…
-Finding ways to be frugal so that you don’t feel crunched when you get a chance to enjoy the good stuff. You’ll finally be able to take that trip you have been planning or buy the fishing rod you have been dreaming about. You like expensive organic groceries? Plant a garden. Immensely enjoy coffee?(guilty here) Brew your own and take a thermos with you. Have your Financial Planner give you an insurance review, rates change and there is often a chance to save money in that area.
Some debt “gurus” will tell you that you have to cut out all fun and not spend money on anything. If times are really tough that may be necessary. But, before you let yourself get to that point take some time to figure out what is important to you and how you can do more of that, at the expense of those meaningless things dragging you down.
If you need any help or just have a question, I am happy to be a sounding board.
“Never keep all your eggs in one basket” is an age-old adage and a great rule of thumb for investing. As a matter of fact it’s a pretty good motto for life in general and there are countless examples. So why do people forget to diversify when they utilize employee stock purchase plans? Employee purchase plans can be awesome and should almost always be utilized to the max when they offer stock purchase at a discount to market price. But that doesn’t mean you have to keep it all, so why do we?
First let’s take another look at the benefits of not putting all the proverbial eggs in the same basket. When you remember to diversify and spread out the things that are important to you, you protect yourself from risk. By diversifying your assets or prospects, you minimize the negative effect that an adverse event in any given area of your life can have on you. For example I’ll use an analogy unrelated to investing – looking for a job. If you set up interviews for five prospective opportunities, one rejection is not the end of the world. However, if you only set up one interview that same rejection can be devastating.
If you think losing a prospective opportunity can be rough, just think about losing most of what you have worked for over the past 5-35 years. Now think of what it could be like to lose all that and lose your job at the same time. Of course it sounds severe, but this is a realistic phenomenon experienced by employees of companies such as K-Mart and Enron, when they lost not just one but two major assets due to the failure of their employer.
There are less severe instances where employees have suffered large losses due to changes in the price of their employee stock. These examples come up frequently, and of course the period from 2007-2009 was fraught with cases of employees losing half or almost all of their savings only to be laid off around the same time. Even people who are still working with nice job security can feel the effects of having their employee stock drop 15% in a day on bad news if they have a lot of savings tied up in it. And if the stock of your employer is dropping like a rock, bad news or not, you might feel less than secure about your job, as well. Just recently employees of the technology company Oracle experienced a drop like this when shares traded down over 16% at times on December 21st after a disappointing earnings report.
So why does this keep happening to people? The reasons I’ll address are generally psychological, seemingly logical but still irrational, and driven by human nature. Often intelligence has little or no bearing on occurrence of the thought processes leading to over-utilization of employee stock. And while the reasons I’ll discuss below aren’t the only ones they can all lead an intelligent person to completely overlook the risk they’re exposed to.*
1. Employee Bias – It’s every good employee’s job to know their company’s value proposition. Especially in a large corporation everyone from cashiers to sales people is expected to be able to recite why his or her company is better than their competitors, how long it has been around, and why it will be around for all time as a leader in its industry. Good employees also work hard to make their company that much better so it only makes sense to tie the future value of their savings to the fate of the company they pour their blood sweat and tears into. Note: this is the polar opposite of diversification. If I follow this philosophy I would be putting all my eggs in one basket because I have great reason to believe in that basket. Now, not only is my income dependent on the success of my company, so is the value of my savings. The disappearance or bad performance of one can directly cause the same result in the other.
2. Familiarity or expertise – If I sell high tech widgets for ABC company I have every reason to know as much about high tech widgets as I possibly can. Therefore I am an expert in high tech widgets and know about what the high tech widget industry has coming down the pipeline for the near future. Since I know the widget market as well as I do and expect it to grow rapidly it makes perfect sense that I should keep holding my employee stock indefinitely.
3. Local bias – Using the previous example lets say the high tech widget industry is experiencing a downturn, and I know it. However, widgets coming out of my area are still selling at normal levels and I expect it to continue because other companies around me seem to be doing better than their competitors in other parts of the country. Since my area seems to be isolated from the downturn I feel strong about holding on to my company stock.
4. Pavlov investing – John used to work at another widget company and held his company stock the entire time he was there. When he left he had gained 150% on his company stock after 8 years (over his average price, after employee discount). Therefore he rationalizes that he can expect a similar result with his new widget company that seems to be just as great as the last. This programmed response to past stimuli is common in investing and can also be the most dangerous way of thinking about an investment. Past performance does not predict future results, and the market factors that drove the previous stock price may have changed or even ceased to exist.
By holding a large percentage of your wealth in your employer’s stock, your risk related to that company is substantial. It is likely greater than the risk you have in your 401k, your mutual fund accounts, or even your house. Your savings should never be heavy in one stock because of the effect an adverse event for that stock can have on your savings. If you put that stock in the same boat as your livelihood your one ship fleet can sink pretty quickly.
So, what should I do with my employee stock purchase plan? There are very few cases where we wouldn’t recommend participating in an employee stock plan, and those would usually be in plans that don’t offer a discount. If you have the opportunity to buy stock at a 15- 25% discount to the market price it is usually a great opportunity. Except in the case of restricted stock you have the right to sell the stock when you please, which can give you a distinct advantage towards making a profit given your discounted purchase price.
You can consider selling immediately in hopes of a profit close to the amount of your discount, and many people do. As an alternative to that you can always hold some and just sell off a certain amount each quarter. If you work for a great company and want to hold some of their stock I recommend it. But, I recommend that you set an amount that represents a certain percentage of your net wealth and sell any stock above that percentage. For some people this may be five percent, for some younger and more aggressive it may be 15%. The idea here is to limit your exposure to that one company. If you already depend on them for your salary then having 15% of your wealth also tied up with them could be pretty aggressive.
What can you do with the money you receive from selling employee stock? It’s your money so you can do what you want with it, but I recommend saving it in some way. While I have some ideas for this it isn’t appropriate to recommend them in a public forum. So, that decision should be made with the help of your financial consultant with regards to your current financial situation, goals and objectives.
If you would like to discuss anything from this article please feel free to call us, and we would be happy to talk about it. In conclusion, always remember it is much harder to sink a fleet of ships than one large tanker. If you ever find yourself on that lonely tanker it may be a good time to ask yourself where the rest of your armada is.
* Source: Are Empowerment and Education Enough? Underdiversification in 401(k) Plans. http://www.econ2.jhu.edu/seminars/elyLectures/2006/empowerment_and_education.pdf
