Ritholtz Wealth Management started what would likely be a new sub-podcast more for corporate shareholders, real estate investors and business owners. This is likely what they have distilled from managing the wealth of their higher net worth clients in this realm.
The first episode is one that might interest you if you have restricted stock units, shares, incentive shares issued by your company.
How Nvidia Employees Became Multi-Millionaires
They walk through one of the best case studies there is, which is Nvidia’s Employee Stock Purchase Plan (ESPP).
Nvidia has an ESPP where they allow their employee to invest up to $25,000 a year in Nvidia stock, at a 15% discount to the lowest price in a six-month look back period.
So they simulate what will happen if you invest semi-annually for 10 years and the value today. They show the gain difference if you have discount and no discount.
If you ask me, both look pretty good but I wonder will someone lament “my employer is so bad, don’t even give a discount for our ESPP!”
This might be an example of:
- We cannot see it when we are at a certain stage of the journey but will lament and regret later on.
- Why it is important to figure out what is critical (in this case how well the company shares have done, relative to everything else).
They mentioned that aside from Nvidia, Apple’s ESPP might come in second.
Many Might Not See How Sequence of Return Feature in All This.
One of the services an adviser do is to help a client who made their wealth through their company’s option to determine how much income they can safely withdraw from their portfolio.
Why do these people need an adviser’s help?
If you manage to do very well as a result of the shares and options of your company, you have a rather concentrated position.
Advisers will advise you to be less concentrated and be more diversified.
There can be a lot of reasons but I got to admit… even I didn’t recognize negative sequence of return as a main problem.
Until Joey brought it up in the video.
For those who do not know what is negative sequence of return, in real life, a portfolio performance is not in a straight-line (like 7%, 7%, 7%, 7%, 7%) but goes up and down. If your portfolio drop 10%, it takes a 11% gain to recover. If your portfolio drop 40%, it takes a 67% gain to recover. If the drop is 50% (not too different from 40% on the surface), it takes a 100% gain to break even.
If you are not spending down your money, and you have the holding power, that may be ok. But if you are spending from your portfolio, you can potentially kill the portfolio.
I think one of the best example is this case study presented in Jim Otar’s Advanced Retirement Income Planning:
Karen had a $1 million portfolio invested in the Dow Jones index. She decide to with draw $50,000 a year, indexed to inflation (which means inflation adjusted income). She retired in 2008, saw her portfolio get cut but she continue to take out a real income of $50k from the portfolio.
Notice that after that, the US was in a bull market. Per Jim Otar, the index gain 300% in the period, but she ran out of money prematurely. While she harvested all the returns, the amount she took out impaired the portfolio. Imagine if its down 50%, you need 100% to recover. You take out another 5% its 55%, you need 120% instead of 100% recovery. That is just one year, the following few year you still take out 5% inflation adjusted.
Many didn’t realize that the risk in retirement is not just returns but considering some challenging sequences.
A single stock has a much higher volatility than a 60/40 diversified portfolio and if a stock like Nvidia can give you this kind of return, it has a much higher volatility profile.
Joey simulated the amount of capital that you need for an income need of 35 years, between a single stock with 40% annualized volatility and one with 15% annualized volatility. Likely he used different rates of return (5%, 7%, 9% and 11%) and simulate many mathematical return sequences with a 90% success rate.
What you see is that the amount of capital needed for that $200,000, 3% inflation-adjusted income is much less with a diversified portfolio.
Why is the capital needed much less?
Because you have less situation where the stock goes down 70% and you need so much more capital to come back. Again, it emphasize the point that when spending, the name of the game is not just about returns anymore. Only by not impairing your capital can your portfolio be saved.
Or you choose to reduce the volatility profile of your portfolio.
We go back to the question of why do you need help to determine how much income you can safely withdraw. If you think the strategy is safe, so much so that even with a concentrated position it will be ok, then we really hope that the strategy you come up with is safe, or you considered how to really mitigate sequences.
A List of Liquidation Strategies
Joey also listed a list of employee options or share liquidation strategies:
The two did not go deep into the list but just by providing a list of strategies Joey have thought about, their pros and cons is pretty helpful. It lets me know at least what are the weird stuff out there, but also what are some of the considerations.
Like many things there are no best strategies. Each have their pros and cons.
I like the Trend Follow and prune strategy haha but its good to hear what is the constrain there.
I think the most recommended is Regret Minimization, which is trying to answer the question of what do you fear the most, and you try to address that. The downside is that you may regret the regret minimization! You should have sold/bought.
Hope this is useful for some of you.
If you like this stuff and wanna tap into my money brain, do join my Telegram channel.
I share what I come across in:
- individual stock investing
- wealth-building strategies
- portfolio management
- personal finance, financial independence.
I would also share some of the thoughts of wealth advisory, financial planning and the industry that I don’t wanna put out on the blog.
Would probably share some life planning case studies based on the things I hear or came across as well.
Kyith is the Owner and Sole Writer behind Investment Moats. Readers tune in to Investment Moats to learn and build stronger, firmer wealth foundations, how to have a Passive investment strategy, know more about investing in REITs and the nuts and bolts of Active Investing.
Readers also follow Kyith to learn how to plan well for Financial Security and Financial Independence.
Kyith worked as an IT operations engineer from 2004 to 2019. Currently, he works as a Senior Solutions Specialist in Insurance Start-up Havend. All opinions on Investment Moats are his own and does not represent the views of Providend.
You can view Kyith’s current portfolio here, which uses his Free Google Stock Portfolio Tracker.
His investment broker of choice is Interactive Brokers, which allows him to invest in securities from different exchanges all over the world, at very low commission rates, without custodian fees, near spot currency rates.
You can read more about Kyith here.
