I was employed by one of the FAANG employers (common acronym for technology giants that include Facebook, Apple, Amazon, Netflix and Google) and earned a good amount of RSUs (Restricted Stock Units). I have held a large portion of these RSUs for almost 7 years and now I am convinced to sell them all for better diversification.
I wanted to write this on my blog since I did not find any good reasonable single page of advice on various forums for managing RSUs.
These are some key learnings from my recent research.
First Thing First – The Books That Influenced This Blog Post
These are the books that impacted my thinking. I highly recommend these books to get an independent perspective.
- Common sense investing by John C Bogle
- A Random walk down wall street by Burton Malkiel
- The Intelligent Investor by Benjamin Graham (The mentor of Warren Buffett)
Why Do Most FAANG Employees Hold Their RSUs?
Why Do Most FAANG Employees Never Buy More of the Same Stock Outside RSU and ESPP?
This is a common pattern and a well accepted behavior that makes me wonder why most of us, including me, will not buy more of the same company stock from the direct stock market. Probably, because we know that it is already very risky and again there is a Friction to Act.
Diversification is Key
Diversification is essential for a long term investment horizon. You must have a well diversified portfolio. Keeping a lot of your investment in a single stock is extremely risky even if it is a FAANG company.
To try out a simple FAANG biased diversification strategy I made a hypothetical portfolio that has all FAANG stock with equal allocation. This portfolio looks like this
FB – 20%
AMZN – 20%
NFLX – 20%
GOOG – 10%
GOOGL – 10%
I have split GOOG and GOOGL into equal parts for simplicity. Now let us try to backtest this portfolio and see how it plays out.
Backtest #1: FAANG vs Apple
Backtesting Results of “All FAANG Combined Portfolio” vs “AAPL”
Verdict: FAANG Combined portfolio beats Apple
This backtest shows how in the last 8+ years FAANG stocks combined beat each one of Apple, Amazon and Netflix.
Backtest #2: FAANG vs Facebook
Backtesting Results of “All FAANG Combined Portfolio” vs “FB”
Verdict: FAANG Combined portfolio beats Facebook
This backtest shows how in the last 8+ years FAANG stocks combined beat each one of Facebook and Google.
So my learning from this is if I am employed in any one of these companies I should sell 80% of my RSUs and then diversify in other FAANGs or better investment to make my portfolio better.
I just took FAANG as an example portfolio, I am pretty sure that there are better portfolios that can easily beat FAANG – like this backtest with a popular 3X leveraged investment of TQQQ beats all FAANG together.
Even before you jump to any conclusion, do more research and I assure you that you will find an even better portfolio, and when you find it don’t forget to share with others.
What Are Some Good Diversification Options?
For FAANG and Other Tech Workers?
- Lary Swedroe Portfolio – This portfolio rely on small cap and total world market exposure. This portfolio beats SnP 500 consistently over decades.
- International exposure using index funds like VXUS, IEMG and similar.
- Real estate investments – these are commonly trusted for high gains.
- Direct real estate is common yet difficult due to large investment.
- Passive real estate investments via platforms like CrowdStreet and Fundrise.
Why Holding RSU is a poor choice
Everyone knows this yet reiterating
Generally there are many examples shared with us about companies like Enron, Lehman Brothers, GM and more.
All Eggs in one basket
Keeping shares of the company you work for is multi fold risk in worst case scenarios like company crash generally is followed/preceded by a mass layoff. This makes the situation even worse for employees who have been holding the RSU and ESPP forever.
Biased investment decision
Most employees have a very biased one sided perspective of the employer that makes their decision a weaker investment choice. Knowing inside information and future projection is often misleading.
Selling windows are limited due to insider trading limitations
Most companies do have a big insider trading window. This may cause a lot of difficulty in selling RSU in time. You may end up almost always missing the peaks.
No Single Company Stock can Beat the market for long term
This has been proven and insisted by many successful investors. If you do not agree you may want to read some of the books in top section that impacted my thinking.
Do Your Own Research, and share your opinion with me
Just wanted to clarify that this is not investment advice, but more of my opinion based on recent internet research. I am not even qualified to suggest anything reasonable for investment. Please do your own research before you jump to any conclusions.
More Forums and Resources for your research
Reddit Sub: FatFire
This is a sub reddit that has many FAANG employers boasting and also looking for advice from like minded people. If you feel like rich people, go to this sub and get comfortable.
Reddit Sub: Personal Finance
This SubReddit has a lot of members who give good suggestions on the long term strategy and systematic diversification.