With the tech-heavy Nasdaq index down more than 25% so far this year, many tech employees worry that they are seeing a replay of the dot-com boom and bust of the late 1990s and early 2000s. And although those fears may be well-founded (there are certainly several similarities between now and then), since the financial crisis of 2008 and its eventual recovery, the tech sector has proven quite resilient.
Nevertheless, if you hold restricted stock units (RSUs), non-qualified stock options (NSOs), or incentive stock options (ISOs) that vested at a price far higher than today’s market price, it is natural to feel a sense of loss or panic. Those paper losses can certainly take an emotional toll on those who receive at least a portion of their total compensation in the form of equity. Here are a few tips for managing your emotions and making decisions about equity compensation in a down market.
First, it is important to remember that you are not alone. Many other tech employees are in a similar position and are feeling the same way you are. And although the media will focus almost solely on how bad things are at the moment, it is important to keep things in perspective. For example, while the Nasdaq may be down 25% or so from the start of the year, the index is still nowhere near the 77% drop it experienced before bottoming out in October 2002.
Also, help may be on the way. It is a common practice for companies issuing stock (especially in the tech world) to either issue employees additional shares to help offset losses or reprice those shares outstanding. Either way, companies are generally attuned to the sentiments of their workers and often do what they can to help keep employees focused on their duties and not on their wallets.
Second, it is also important to keep in mind that your RSUs, NSOs, and/or ISOs are not worthless simply because the current market price is down. It isn’t until you decide to sell a stock that your paper losses become actual, realized losses. However, if you hold on to the stock long enough, there is a good chance the market will rebound, thus allowing you the opportunity to recover at least some of those losses.
With that in mind, if you do decide to sell some or all of your underwater RSUs or ISOs, be sure to first consult with a tax professional. They can help you understand the tax implications of selling your equity in a down market.
Third, it is critical that those who receive even a portion of their compensation in the form of equity develop a plan for how and when to convert those shares to cash and stick to it whether the broader market is up or down. For instance, if you have done the math and decided that it makes sense to sell 50% of the shares you are issued each year and diversify into other investments, then suddenly finding yourself in the midst of a bear market should not discourage you from following your plan.
That same logic applies to tackling your short-term financial goals. Say, for instance, you plan on purchasing a new vehicle, building a substantial emergency fund, or contributing to your child’s college savings account and have established a plan to sell just enough shares to fund those goals each year, you should not have to worry about the price/value of the remaining shares you hold until next year when it is time to fund those accounts again.
Finally, to paraphrase the great investing legend Warren Buffet, with respect to the markets, it is important to be greedy when others are fearful. According to a report from the National Bureau of Economic Research (NBER), investors reinvest twice as much after experiencing a gain versus a loss. This means that those same tech employees who receive substantial sums in the form of RSUs, ISOs, and/or NSOs are likely to have loaded up on even more shares while their company’s stock price was at its highest levels, either via the employer stock purchase plan (ESPP) or in a regular brokerage account.
However, following Mr. Buffet’s logic, the best time to double down and purchase additional shares in a high-flying tech company is when its share price is down from its highs and others are scaling back—not when it’s at its peak.
Throughout the history of the U.S. stock market, bear markets and recessions occur frequently and should be seen as normal. So, try and focus on the bigger picture. History teaches us that those who stay invested through the good times as well as the bad tend to fare better than those who instead choose to sell-off shares in a down market and incur losses, although they did not have an immediate need or purpose for the dollars once they received them.