The emotional attachment with your employer’s stocks can land you in trouble.
One of the ways a person can grow rich quickly is by owning the shares or ESOPs of the company he is working for. We have read many stories of employees becoming millionaires as the company they are working for goes public or sold to a larger company. It may sound cool to own your employer’s shares in anticipation that the company rewards you with rising stock prices. But, what if it does not happen? Worse – if it backfires. Consider a situation when an employee loses his job due to slowdown in the sector. It is a double whammy: loss of regular income as well as portfolio value.
“Investments have to be treated like investments. Do not let your emotions over-ride your investments,” says Harshavardhan Roongta, principal financial planner at Roongta Securities. Many times employees are emotionally attached with the shares they have got as a part of their remuneration package. While some of them look at these shares as a prized possession, some look at them as a lottery ticket – which may make them wealthy if the company does well.
Whatever be the case, they forget the fact that they are getting exposed to concentration risk. There are two schools of thought on concentration. The believers in Warren Buffett’s approach to investing advocate – ‘putting all your eggs in one basket and then watching the basket carefully.’ But seldom one can unemotionally handle his holdings as behavioural biases come into play.
Think of a scenario wherein one’s 60 percent or 70 percent networth is in one stock and the stock halves in three months. No professional money manager will ever take a bet like that. But in an individual capacity many individuals live with such misdemeanors and then end up regretting their decisions in most cases, other than the lucky few who end up rich. That opens the gates for the patrons of diversification.
“If one stock weighs around 30-40 percent of your networth, the logical answer is to diversify across stocks and other asset classes,” says Abhijit Bhave, CEO, Karvy Private Wealth. “The corrective action for concentrated portfolios will depend on the portfolio composition, risk profile, financial goals and income earning capacity of the individual as well as the future outlook of a particular asset class.”
Investing across asset classes may appear to be a better solution, but most individuals find it difficult to implement it. The biggest obstacle comes in the form of resistance to selling these shares. Harshavardhan Roongta says, “The shares or ESOPs are offered as a part of his compensation package to the employee. If one uses salary to achieve his financial goals, why not look at the shares so obtained in the same way?” You should first define your financial goals and then look at it your holdings in the context of your financial goals. The concentration risk may throw you off the way to your financial goals. To avoid this situation, you have to embrace the idea of a diversified portfolio.
“If you are holding shares of a company which operates in a sector that is not offering high growth, then it makes sense to sell some shares of your company and buy a portfolio of quality mid and small cap shares that may offer you high growth,” says N Arunagiri, MD and CIO of Chennai-based TrustLine India, a portfolio management services provider. You can do so either through a dedicated portfolio management service or through mutual fund schemes that invest in mid and small cap stocks. If you are holding shares of companies that are facing structural headwinds or expected to post anemic growth, one should consider diversifying across sectors.
“Selling your employer’s shares held for a long period of time is a tough decision for many individuals. One can start by selling small quantity of shares and test the waters,” Arunagiri adds. If your experience with such investments makes you comfortable with such investments, you can switch more money to such diversified investments.“You can pay for your dream home using some of your shares, instead of borrowing to the hilt,” says Harshavardhan Roongta. You can also build an investment portfolio with exposure to shares, bonds and other asset classes depending on your goals and your risk profile.