80% loss of net worth. That’s what I personally saw a top-level executive go through because he wasn’t able to emotionally detach from a certain stock he owned. False hope of bouncing back and poor asset allocation caused him to lose millions of dollars.
As a high income earner, chances are you have accumulated some corporate stock or had success investing in one particular stock that has grown over the years. This is a common thread I see among many top-level executives. While it’s been beneficial for you, that position of concentrated stock can have negative ramifications in the future.
The key to avoiding a situation like the executive above is having a strategy in place to maximize and balance your portfolio. As an executive financial advisor, there are a few investment strategies for high income earners I find most effective for doing this. Here’s a look at those strategies in more detail.
Key Investment Strategies for High Income Earners
Specifically, key investment strategies I’ve found to be most effective for the portfolios of high income earners include asset allocation and concentrated stock management through equity compensation planning.
World famous self-help guru Tony Robbins once said, “The difference between success and failure is not which stock you buy or which piece of real estate you buy, it’s asset allocation.” Whether or not you subscribe to his methods, the fact of the matter is, he’s right. Asset allocation plays a pivotal role in whether or not you enjoy success and financial well-being in the long term.
In fact, in the case I mentioned earlier, if that executive had developed a strong or even basic asset allocation plan, he would not have lost nearly 80% of his net worth. While his case is an extreme one, it is a recurring theme I see among high income earners. It seems that executives, like the majority of people, can become emotionally attached to things, including a particular company and its stock. Even if your grandfather left you stock from a company he worked for his entire life, I doubt he would want you to lose the majority of your savings just to say that you held onto the stock.
Managing risk in your portfolio can help you remove the emotional factor that can lead many investors astray. Considering what makes the most sense for you as an investor, whether you are conservative, aggressive or somewhere in between, helps align your investment approach with a solid asset allocation strategy. While this can be hard to do on your own, it can be achieved with the help of an experienced executive financial advisor who is able to remove emotional bias from the decision-making process.
Concentrated Stock Management
While asset allocation is one of the most important investment strategies to consider, it can be thrown off due to a large concentration in one particular stock. It is not uncommon for a top-level executive to have half of their net worth tied to their company stock.
While many Investing 101 courses would tell you that a stock holding should never account for more than 10% of your portfolio, that isn’t always feasible or even allowed for top-level executives and high income earners. Often, large companies have requirements or suggestions regarding how much company stock an executive should hold. This is something that cannot be avoided in most cases.
The idea of concentrated stock management isn’t to completely reduce your concentrated stock holding (although we would like it to be somewhere around the 30% mark), but rather to limit it. A way to limit your stock concentration is to consider other forms of equity compensation through your company. This is a concentrated stock management option that a trusted wealth manager can recommend and help you implement with equity compensation planning.
Equity Compensation Planning
Many large companies tend to focus on compensating their top-level executives with employee stock options, but there are other forms of equity compensation that can be a key component to your overall equity compensation plan.
If allowed or offered by your company, you might consider some of the following strategies to help diversify your equity compensation and overall investment portfolio:
- Increase cash compensation. If you increase your cash compensation, you can use the funds to purchase alternative investments to your company stock. This lowers your overall exposure to your company stock and brings more diversification to your portfolio.
- Use restricted stock units. Restricted stock units (RSUs) are similar to employee stock options, but they are given a predetermined vesting schedule. When they become fully vested, they are paid as income to you at a fair market value. A number of the shares are withheld to pay the income tax owed. The remaining shares are yours to sell or hold as long as you like. An experienced executive financial advisor can help you determine the optimal time to sell. Because of the way they are structured, RSUs can help remove a potential taxable burden, making them an effective option for your portfolio.
- Deferred compensation. Deferred compensation allows you to delay your pay to a later date, typically around retirement, when you are in a lower taxable income bracket. This allows you to avoid a larger tax bill during your working years. This benefit also helps counterbalance your concentrated stock position.
Implementing Investment Options for High Income Earners
When it comes to investment strategies and options for high income earners, what is most important is that you understand your own unique financial situation and devise strategies that work for you. Don’t wait until the sky is falling and you’re losing money to evaluate your portfolio. You must be proactive. This is why it is important to work with a trusted wealth advisor who can give you impartial and tailored advice. No one sets out to lose 80% of their wealth, but if you don’t take the proper steps to diversify, you could be exposing yourself to the same concentrated risk.
K. Wade Carpenter, CFP®, AIF®, ChFC®, CLU®, is an innovative wealth manager serving corporate executives and entrepreneurs from coast to coast. Throughout his more than 25-year career, Wade’s focus on C-level clients has made him a top strategist for equity compensation strategies and financial planning for high income earners. For more information on how Wade and the Carpenter Team can advise you on effective investment strategies for high income earners, reach out today for a complimentary consultation.
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