In the first three parts of this series, we used an avocado analogy to discuss when it’s time to exercise your stock options (pick the avocados), what it takes to be ready to sell your shares (make guacamole), and how to keep more of that guacamole for yourself and those you care about. In part 4, we’ll look at the importance of using multiple avocado sources to ensure more and better guacamole.
Diversification: Don’t rely on just one tree.
When you buy avocados from the grocery store, they aren’t all from a single tree, they are from many farms with many trees. The store wouldn’t rely on a single tree for all of your avocados, because some years they may have none. Your company stock (the original avocado tree) may be producing lots of fruit at the moment, but relying on a single tree for all your avocados is a risky proposition. Planting some of those seeds helps ensure you have an uninterrupted supply of guacamole.
If your company stocks are soaring, it can be tempting to stay all in to ride the hot hand. Without diversification, however, you have a much greater risk of loss and miss out on the opportunity to profit from other types of investments. Selling some of your shares and using the proceeds to purchase other investments allows you to create a more balanced portfolio that’s less susceptible to a single stock’s ups and downs.
Financial Planning: Be ready to mash.
Avocados that rot on your counter are no use in making good guacamole. That’s what happens when you buy them, but don’t have the other ingredients ready to go. The same can be said for company stock: the right price at the right time means nothing if you can’t sell. As we discussed in part 2 of this series, lockup and blackout periods restrict when company insiders are allowed to sell their shares. Creating a 10b5-1 plan allows you to be ready to go.
Being ready includes all the basics of any sound financial plan. First, you must clarify your short- and long-term financial goals. From there, you can begin to work with a trusted (preferably fiduciary) investment expert who can use evidence-based techniques to develop a comprehensive strategy to meet your goals. This will include choosing the right mix of asset types to properly diversify your investments.
Rebalancing: Get the right flavors in your guacamole.
With market ups and downs, the relative value of your investments will shift over time. Oftentimes, we think we have the right mix of ingredients, but we may have been a bit heavy-handed with one or two. You can think of spreading your investments across market sectors as adding spices to your guacamole. Everyone has that sweet spot of onion to salt to lime to avocado ratio, and sometimes it needs tweaking.
Tax-Loss Harvesting: Get rid of poor products.
After you’ve put time, effort, and care into picking out all of your ingredients, it can be hard to throw some away. We don’t like to feel like we’ve wasted anything. However, by leaving in ingredients that have gone bad, we just have worse guacamole. Cutting out the bad flavors is addition by subtraction. When one or more of your investments is underperforming, instead of hanging on and hoping against all odds for a turnaround, you could simply cut out the ingredient and substitute a similar one in its place. In the case of investments, it’s also a way to save on taxes! Active tax-loss harvesting is a strategy of selling off shares that have depreciated as a way to limit tax liability by reducing your taxable gains. Despite the loss you incur on the sale of depreciated shares, a well-planned tax-loss harvesting strategy can have the effect of boosting overall gains.
Exponential Growth: More ingredients mean more guacamole for the future.
When you’re able to keep more of the proceeds from your share sales for yourself, you have more money available to invest (more guacamole), which allows you to exponentially grow your wealth. A sound strategy that incorporates planning, investment, diversification, rebalancing, and tax efficiency can create abundance, so you can have all the guacamole you desire and plenty to share with the people and causes you care about.
WRP can help you make the most of your avocados.
At WRP, we specialize in complete wealth management for employees and executives in pre-IPO companies. We understand the IPO process is a long and complicated one, and we’re dedicated to helping each of our clients reach their individual financial goals, keeping their unique values and priorities in mind. To learn more, subscribe to our blog or check out our free resource library.