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.
You are now subscribed
Your newsletter sign-up was successful
Want to add more newsletters?
Delivered daily
Kiplinger Today
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more delivered daily. Smart money moves start here.
Sent five days a week
Kiplinger A Step Ahead
Get practical help to make better financial decisions in your everyday life, from spending to savings on top deals.
Delivered daily
Kiplinger Closing Bell
Get today's biggest financial and investing headlines delivered to your inbox every day the U.S. stock market is open.
Sent twice a week
Kiplinger Adviser Intel
Financial pros across the country share best practices and fresh tactics to preserve and grow your wealth.
Delivered weekly
Kiplinger Tax Tips
Trim your federal and state tax bills with practical tax-planning and tax-cutting strategies.
Sent twice a week
Kiplinger Retirement Tips
Your twice-a-week guide to planning and enjoying a financially secure and richly rewarding retirement
Sent bimonthly.
Kiplinger Adviser Angle
Insights for advisers, wealth managers and other financial professionals.
Sent twice a week
Kiplinger Investing Weekly
Your twice-a-week roundup of promising stocks, funds, companies and industries you should consider, ones you should avoid, and why.
Sent weekly for six weeks
Kiplinger Invest for Retirement
Your step-by-step six-part series on how to invest for retirement, from devising a successful strategy to exactly which investments to choose.
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.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free 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.
-
Dow Leads in Mixed Session on Amgen Earnings: Stock Market TodayThe rest of Wall Street struggled as Advanced Micro Devices earnings caused a chip-stock sell-off.
-
How to Watch the 2026 Winter Olympics Without OverpayingHere’s how to stream the 2026 Winter Olympics live, including low-cost viewing options, Peacock access and ways to catch your favorite athletes and events from anywhere.
-
Here’s How to Stream the Super Bowl for LessWe'll show you the least expensive ways to stream football's biggest event.
-
How to Add a Pet Trust to Your Estate Plan: Don't Leave Your Best Friend to ChanceAdding a pet trust to your estate plan can ensure your pets are properly looked after when you're no longer able to care for them. This is how to go about it.
-
Want to Avoid Leaving Chaos in Your Wake? Don't Leave Behind an Outdated Estate PlanAn outdated or incomplete estate plan could cause confusion for those handling your affairs at a difficult time. This guide highlights what to update and when.
-
I'm a Financial Adviser: This Is Why I Became an Advocate for Fee-Only Financial AdviceCan financial advisers who earn commissions on product sales give clients the best advice? For one professional, changing track was the clear choice.
-
I Met With 100-Plus Advisers to Develop This Road Map for Adopting AIFor financial advisers eager to embrace AI but unsure where to start, this road map will help you integrate the right tools and safeguards into your work.
-
The Referral Revolution: How to Grow Your Business With TrustYou can attract ideal clients by focusing on value and leveraging your current relationships to create a referral-based practice.
-
This Is How You Can Land a Job You'll Love"Work How You Are Wired" leads job seekers on a journey of self-discovery that could help them snag the job of their dreams.
-
65 or Older? Cut Your Tax Bill Before the Clock Runs OutThanks to the OBBBA, you may be able to trim your tax bill by as much as $14,000. But you'll need to act soon, as not all of the provisions are permanent.
-
The Key to a Successful Transition When Selling Your Business: Start the Process Sooner Than You Think You Need ToWay before selling your business, you can align tax strategy, estate planning, family priorities and investment decisions to create flexibility.
