Have Equity Compensation? Strategies to Handle Stock Market Volatility
The stock market can be volatile, as we’ve all seen recently. To make the most of your equity compensation and manage your income tax bill at the same time, it’s important to consider what you have, what you can do, and how your stock fits into your financial plan.


If you’re an investor in the stock market, it’s likely that you have experience with volatility, which often can strike unexpectedly. However, if you are the owner or recipient of equity compensation and employee stock options, you may not realize that volatility can have even more of an impact on your financial future.
A dramatic stock price change can quickly alter the value of your stock options and other equity compensation, whether positively or negatively. With careful planning, however, you can think through how market volatility should be managed to mitigate the threat to your stock options' value.
Don’t Get too Wrapped Up in Day-to-Day Fluctuations
Stock options and other types of equity compensation are tools companies use to attract recruits, inspire employees and boost retention. The hot stock market in recent years has added to their appeal.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Accordingly, your financial plan may have included plans to exercise your stock options (by buying shares of stock at a pre-determined price set by your option agreement) or selling the shares you already own, turning company stock into cash that can be used for other needs. It is only natural for increased volatility to cause you to re-evaluate your plans.
When things don't go well for your company stock, it's easy to become preoccupied with watching the stock price and grow concerned about short-term volatility and its impact on the value of your equity compensation. But remember that stock compensation is often a long-term deal. The Harvard Business Review reported that option grants have dramatically strengthened the link between pay and performance, besides encouraging recipients to adopt a longer-term perspective toward options.
If you get equity compensation, rather than keeping an eagle eye on stock prices and market fluctuations, consider the following smart approaches.
Be Realistic about Stock Prices
It’s important to maintain a realistic outlook on the value of your company stock. When the stock price rises, it’s easy to become excited about the prospects for further growth and an increased value on your statements. But you only “capture” the value of your stock gains if you decide to sell your shares.
If the stock price declines, the value of your stock options and restricted stock may drop too, leaving you with less than what you had hoped for, and negatively impacting your financial plans. It makes sense to monitor your stock options during down periods, because several planning opportunities may exist.
For example, you may want to evaluate several factors during down markets, including their effect on your alternative minimum tax (AMT) obligations, if any. If you exercise now, what will that mean for your AMT obligations? You many also want to look at the holding period of the shares you own and evaluate whether you should hold for a long-term capital gain. Typically, if you hold an investment for at least a year from the date it was purchased, it is considered a long-term gain and taxed at preferential long-term capital gains rates.
Timing both your exercise of incentive stock options (ISOs) and your sale of stock is crucial if you receive and want to manage AMT and benefit from the long-term capital gains tax treatment. To obtain preferential tax treatment, ISOs require you to sell your shares at least one year past the date you exercise the shares and at least two years past the grant date.
Some ideas for ISOs may include exercising your options as early in the year as possible. This gives you the chance to time the actual sale based on the stock performance during the year. Another strategy is exercising options at the end of the year, so you can more accurately gauge your total yearly income and probable tax bill.
Diversify Your Holdings
During periods of stock price volatility, it's hard to think about selling and diversifying if your assets are climbing. However, diversifying your holdings could protect you from the down periods in your company or industry or the whole asset class. Even during this past year’s volatility, many stocks flourished, while others or entire industries floundered when unemployment skyrocketed. While diversifying doesn’t mean you won’t have any losses, a mixture of assets may help avoid a steep decline when volatility hits.
Ultimately, there is risk if you bundle all your assets in one stock — whether it's your own company’s stock or any other. Concentrated equity may jeopardize your financial future.
To manage this risk, it’s important that you identify how much of your total assets are invested in a single company, determine how comfortable you are with that risk, and then work intelligently to mitigate those risks in a tax-smart, time-sensitive manner that balances your investment risk and financial planning goals.
Plan for Good Times and Bad
As an owner of employee stock options, understanding the potential negative or positive effects of market volatility on the value of your stock options can protect your financial future. By establishing a sound financial plan, paired with a continued reality check in flat markets and times of increased market volatility, you can achieve a beneficial outcome rather than succumb to common fears.
Advisory services offered through Capital Analysts or Lincoln Investment, Registered Investments Advisers, Securities offered through Lincoln Investment, Broker/Dealer, Member FINRA/SIPC. www.lincolninvestment.com
SimoneZajac Wealth Management Group LLC and the above firms are independent and non-affiliated.
Advisory services offered through Capital Analysts or Lincoln Investment, Registered Investments Advisers, Sercurities offered through Lincoln Investment, Broker/Dealer, Member FINRA/SIPC. www.lincolninvestment.com. SimoneZajac Wealth Management Group, LLC and the above firms are independent and non-affiliated.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Daniel Zajac is a CFP® and partner with the Zajac Group, a full-service wealth management firm located just west of Philadelphia in Exton, PA. Zajac specializes in working with clients who have equity compensation and employee stock options, and writes extensively about the topic on his blog at www.zajacgrp.com/insights
-
Stock Market Today: Solid Signals Lift Stocks Despite Tariff Noise
Markets are whistling over the White House in an ongoing display of corporate America's enduring ability to survive and advance.
-
Amtrak Joins Prime Day With Deals on Fares — But You’ll Have to Act Fast
Prime members can score 20% off midweek fares — what travelers should know before booking.
-
Key to Financial Peace of Mind: Think 'What's Next?' Rather Than 'What If?'
Even if you've hit your magic number for retirement, it's hard to stop worrying about money. Giving it a clear purpose is one way to reduce financial anxiety.
-
Three Estate Planning Documents a Business Owner Can't Afford to Skip
A business owner's estate plan should protect the company and its employees as well as the entrepreneur's heirs. These three documents are critical.
-
Opportunity Zones: An Expert Guide to the Changes in the One Big Beautiful Bill
The law makes opportunity zones permanent, creates enhanced tax benefits for rural investments and opens up new strategies for investors to combine community development with significant tax advantages.
-
Five Ways Retirees Can Keep Perspective Through Market Jitters
Market volatility is a recurring event with historical precedents (the dot-com bubble, global financial crisis and pandemic), each followed by recovery. Here's how people who are near or in retirement can navigate economic uncertainty.
-
I'm a Financial Strategist: This Is the Investment Trap That Keeps Smart Investors on the Sidelines
Forget FOMO. FOGI — Fear of Getting In — is the feeling you need to learn how to manage so you don't miss out on future investment gains.
-
Can You Be a Good Parent to an Only Child When You're Also a Business Owner?
Author and social psychologist Susan Newman offers advice to business-owner parents on how to raise a well-adjusted single child by avoiding overcompensation and encouraging chores.
-
How Advisers Can Steer Their Clients Through Market Volatility (and Strengthen Their Relationships)
Financial advisers need to be strategic when they communicate with clients during market volatility. The goal is to not only reassure them but to also help them avoid rash decisions, deepen your relationship with them and build lasting trust.
-
The Hidden Costs of Caregiving: Crisis Goes Well Beyond Financial Issues
Many caregivers are drained emotionally as well as financially, leading to depression, burnout and depleted retirement prospects. What's to be done?