Q2 earnings season is underway, and if you’re an executive with concentrated stock positions, a single earnings miss can be a serious blow to your portfolio.
In this short video, I walk through some of the risks tied to earnings volatility and a few strategies worth considering, including NUA, stop-limit orders, and 10b5-1 plans.
If you’ve been putting off a conversation about concentration risk, earnings season is a good reason to stop waiting.
Watch now.
Transcript
July kicks off Q2 earnings season, and if you work in tech or pharma, you already know what that means. In the next few weeks, the companies you watch closely are going to report results. When one of those companies misses its target, the stock may drop 10-15% overnight.
Over the years, we’ve seen it happen to major names across the sector. Now, if your portfolio is well diversified, a swing like that is uncomfortable. But if a big piece of your net worth is tied up in one company’s stock, that swing can be a huge hit to your financial plan.
Why Earnings Season Hits Tech and Pharma Executives Harder
I’m Ian Hoffman, a CERTIFIED FINANCIAL PLANNER® with Thrive Wealth Management. I work with executives in tech and pharma, and this exact scenario comes up regularly. Let’s talk about why earnings season hits so much harder for executives specifically.
How Executive Compensation Compounds Single-Stock Exposure
It’s not just your investment account. It’s your salary, your bonus, unvested RSUs, and often your 401k all tied to the same ticker. When that stock drops, every one of those buckets drops with it.
Exploring Net Unrealized Appreciation (NUA) for 401(k) Company Stock
And the math isn’t forgiving. A 15% loss takes close to an 18% gain just to break even. So what can you do about it? One option worth understanding is something called Net Unrealized Appreciation, or NUA.
If you’re holding highly appreciated company stock inside your 401k, and you’re separating from your employer, NUA could allow that stock to be taxed at long-term capital gains rates instead of ordinary income rates. It’s a strategy I suggest discussing with your advisor and CPA before you make a move.
Utilizing Stop-Limit Orders and 10b5-1 Trading Plans
Another option is a stop-limit order. You set a price in advance, and if the stock falls to that level, then the trade triggers automatically. There’s no second-guessing in the moment. Many executives also use the 10b5-1 plan for the same reason. It’s a preset structure that takes the emotion and the timing out of decision and shields them from the insider trading compliance risk
Planning Ahead of Market Volatility
You don’t need to predict exactly what Q2 earnings season could bring. But, you may want to avoid figuring out your concentration risk after the headline hits.
Contact Thrive Wealth Management
If you’d like to talk through how this applies to your situation, contact us today. We’d be glad to sit down with you. To schedule time, call 215-376-5530 or email me at ian@thrivewealth.com. Thanks for watching.
Frequently Asked Questions About Stock Concentration
What is concentration risk, and why does it matter during quarterly earnings season?
Concentration risk occurs when too much of your wealth is tied to a single investment, such as your employer’s stock. During quarterly earnings season, a disappointing earnings report can cause sharp price swings that may significantly affect executives whose compensation and investments are heavily concentrated in one company.
What is Net Unrealized Appreciation (NUA)?
Net Unrealized Appreciation is a tax strategy that may allow certain highly appreciated employer stock held in a 401(k) to receive long-term capital gains tax treatment instead of ordinary income tax treatment when specific IRS requirements are met. Because the rules are complex, it’s important to evaluate whether NUA fits your situation before making distribution decisions.
What are some ways executives can reduce concentration risk before earnings season?
Reducing concentration risk often involves developing a disciplined strategy rather than reacting after market-moving news. Depending on your circumstances, that may include diversifying over time, evaluating tax strategies like NUA, or using structured selling approaches such as 10b5-1 plans. At Thrive Wealth Management, we help executives evaluate concentrated stock positions and build strategies designed to align with their long-term financial goals.
Should I address concentrated stock before or after I leave my employer?
Timing matters considerably when it comes to concentrated stock and employer retirement accounts. Certain strategies, including NUA, are only available at specific triggering events such as separation from service. Waiting until after you have already left a role can close off planning options that were available beforehand. If you are within one to two years of a transition, it may be worth reviewing your options now rather than after the fact.
This material is provided for informational and educational purposes only, should not be viewed as an exhaustive discussion of the topics presented, and should not be construed as individualized advice for any reader’s personal circumstances. For guidance on how these matters may impact your financial plan or investment portfolio, please contact your Thrive Wealth Management, LLC representative. While the information presented is believed to be factual and up to date, Thrive Wealth Management, LLC does not guarantee its accuracy and, due to various factors, including but not limited to changing laws and regulations, this information is subject to change. All expressions of opinion reflect the judgment of the authors as of the date of publication. Thrive Wealth Management, LLC is not a law firm or an accounting firm, and no content contained herein should be construed as legal or accounting advice.
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