Managing your stock options
Vivek is a 53-year IT professional sitting on a large chunk of stock
options. He has managed to accumulate them during his tenure of over
20 years. Thanks to his busy schedule, he didn=92t find the time and
necessity to diversify his portfolio and was very content with his
equity portfolio. With less than 10 years left for his retirement, he
has now realized that he should have booked profits from his portfolio
as his stock was one of the underperforming sectors in the 12-18
months. Though things are beginning to look up for IT sector thanks
largely to weakening rupee, he is upset with notional loss.
In a city like Bangalore, you would find many Viveks who believed that
their stock options could take care of their entire future needs.
However, many of these investors forgot the basic rules of investing =96
diversification of portfolio. Irrespective of the market trend, it is
never a smart idea to put all your eggs into one basket and that holds
good even for stock options.
While those who acquired their ESOPs (employee stock options) more
than a decade ago may be sitting on huge wealth, these investors too
would have missed opportunities of wealth creation as markets gave
handsome returns between 2003 and 2007. Hence, one needs to treat
their stock option portfolio too as any other stock and should resort
to profit booking and create wealth out of it. As you would agree, no
investor would park his entire earnings in a single stock and hanging
on to stock options is no different. Here are some tips for managing
your ESOPs if you are sitting on them.
Profit booking at regular intervals: Wealth creation is not only about
accumulation. Profit-booking is an integral part of wealth management
and in fact, it is tougher to take a sell call than a buy call. Though
a long term investment strategy pays, it may not be a panacea for all,
particularly when an investor=92s wealth is concentrated in a single
stock or sector. As you are aware, companies that were among the top
10 a decade ago, have failed to make it to the top 50 and your company
is not completely insulated from cyclical vagaries.
Hence, it is crucial to sell your stock options at regular intervals
and the same can be invested in other stocks or mutual funds. The
allocation depends on a number of factors such as your age, your short
and long term goals, your liquidity needs, etc. One of the options
could be to reduce holding by selling 5-10% at regular intervals or
fund some of the fixed expenses such as children=92s education through
the sale of these options.
Diversify with other products: Needless to say, after the sale of
options, the funds need to be deployed to meet your long term goals
and the best way to go about the same through diversification of
portfolio. Funds available from the sale of options can be used for
investing in other stocks or diversified funds. One can also use the
portfolio management service option as this would ensure
diversification without actually altering the equity weightage in a
portfolio. Besides diversifying the portfolio with other products,
even dividend income can be used for building other classes of assets.
Since dividend income can run into few lakhs of rupees over a period
of time, the same can be used for various other products such as
pension plan or even insurance cover. If your company has the habit of
paying out more than two dividends in a year, use them for your SIP
with half-yearly frequency. The only hassle with an SIP is that the
amount gets fixed and dividend may vary from one year to another. In
such an event, keep the SIP amount to a minimum level.
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