Most folks intuitively understand the risks that accompany a concentrated portfolio. If asked to bet 60-70% of their net worth on a single company, most would refuse, citing it as too risky. Yet many inadvertently do the same by letting their vested RSUs (Restricted Stock Units) accumulate over the years.

The reluctance to sell RSUs is widespread and is not unique to employees of any specific company, or even industry.

Employees grow an affinity with the shares they receiving as compensation. They develop a nearly unshakeable belief that the company’s share price will not only continue to rise but also outpace the broader market and competitors. This psychological phenomenon of valuing something more highly simply because you own it is known as the Endowment Effect .

Other than the Endowment Effect, there are other reasons too why employees do not sell their shares. Some people, for instance, do not regard publicly listed shares as equivalent to cash. They consider their take-home pay as the actual salary and RSUs as just a bonus they receive “for free”. As a result, they don’t treat them with the same care as their regular savings and investments.

Whatever the underlying behavioural reasons, letting RSUs accumulate leads to extreme concentration in your financial portfolio. We have talked about risks associated with betting on your company previously as well when discussing whether to invest in ESPP (Employee Stock Purchase Plan) or not.

Concentration is a double-edged sword: while it can provide abnormally high returns, it also takes you down a bumpy road, and you could still be left behind. By having so much worth in a single company, your financial well-being becomes tied to that of the company.

Downside Risk

We have all heard stories of people who became multi-millionaires by holding on to the company stock over decades. But we never hear of those who lost all their savings because poor management, disruption or frauds led to massive erosion of value.

As the tech slowdown and resulting mass layoffs of 2022-23 taught us, even the top-performing employees at companies considered beyond reproach are not immune to being laid off.

When the company struggles, the share price too gets hammered. Imagine the company stock being down 70%, and losing your job. Not only do you lose the consistent income stream, your savings too, in the form of company shares, could evaporate in a matter of days. Tens of thousands of employees, from top-notch companies such as Meta, Amazon and Paypal, learnt this excruciating lesson the hard way.

Opportunity Cost

Another often-overlooked risk associated with extreme concentration is the potential opportunity cost.

The company stock might continue to increase but may underperform the broader market. By having your money stuck with one company, you lose the chance to potentially make far more money, with less volatility.

The underperformance of individual stocks compared to the wider market is the norm rather than the exception. Since 1926, just 4% of the companies have contributed all of the net gains for the entire US stock market1. 96% of the companies underperformed the index. Thus, the chances that you work at a company that would outperform the market for decades are minuscule.

The Way Out

To avoid this dangerous situation, sell your RSUs regularly and use the proceeds to diversify your financial portfolio.

Remember that even after selling your vested RSUs, you will not get completely left out from benefitting from future increases in stock price. You will still have unvested RSUs. If you intend to stay with the company and it continues to perform well, these unvested RSUs should increase in value, allowing you to gain from their appreciation.

You can buy index funds tracking broad market benchmarks like Nifty 50. If you want to maintain exposure to US markets, you can consider ETFs tracking S&P 500 or the tech-focused NASDAQ 100 index. These diversified funds do not suffer from company-specific risks, and offer much superior risk-adjusted returns than individual stocks.

The sale also provides an opportunity to rebalance your portfolio amongst various asset classes such as equity, debt, real estate etc.

Deciding every three months whether to sell or not does not work. You will keep chasing a better price and never sell. Instead, establish a rule: aim to sell the shares as soon as possible. If your company has blackout periods preventing share sales, set a reminder to make the sale soon after it ends.

You can consider not selling and holding on to the RSUs if a) you believe that company’s future prospects are undervalued by the market, b) if the RSU’s represent a minor portion of your net-worth (say less than 10%) and c) if you are comfortable with the risk of losing it all. However, keep in mind that that you would effectively be gambling based on your hunch.

  1. Source: Do Stocks Outperform Treasury Bills?  ↩︎