The Data Behind Why You Should Sell Your RSUs Upon Vest
Co-Authored by Josh Radman and Kris Barney
If you’re lucky enough to work at a public company and have RSUs, you have a decision to make every month/quarter upon vest: Should you (1) sell your vested RSUs, or (2) keep them?
Skipping directly to the answer: You should SELL them. Pretty much always.
But we did some analyses to illustrate why – and you’re here reading for that data – so let’s dive in :)
Basically, we geeked out in Excel. We pulled in the monthly returns of every single S&P500 company over the last ~4 years (e.g. the typical RSU grant term), and then analyzed the data in many ways. Here are the key takeaways:
1. An employee who DIDN'T sell their RSUs/stock would’ve had LESS money 72% of the time
Interpretation: the odds were stacked pretty heavily against you (worse than most casino games). Only 28% of S&P500 companies would have resulted in more money if you kept your RSUs vs. selling and reinvesting into the S&P500.
2. The median individual stock return rate was LOWER than the S&P500 by 5.3 points
Interpretation: Selling your RSUs and reinvesting into the S&P500 generated far greater median returns relative to holding onto your RSUs past vest. Note: average return performance shows the same story, but we believe that looking at median (vs. average) is a better overall representation.
3. When adjusting for risk, 97% of company returns were WORSE than that of the S&P500
Interpretation: Holding an individual stock has MORE risk than the S&P500. To “level the playing field” one can calculate a “risk-adjusted return”. We aimed to keep this simple (recognizing that a true calculation is more complex), and just took [Annualized Return Rate / Monthly Volatility]. The higher this number is, the better. Individual stocks tend to have higher volatility (risk) than a basket of stocks (e.g. S&P500). And that’s exactly what we see here. When adjusting for this higher risk, only 3% of individual stocks generated higher risk-adjusted-returns than that of the S&P 500.
4. Some sectors did better than others; but all did WORSE when adjusting for risk
Interpretation: The returns of holding RSUs in individual companies differs by sector. Two sectors (Energy and Information Technology) had modestly higher returns on average in the time period we analyzed. But when adjusted for risk, selling those RSUs and reinvesting in the S&P500 was still the clear optimal choice.
Of all 22 Energy sector stocks in the S&P500, none outperformed the broader index on a “risk-adjusted” basis.
Of all 67 Information Technology sector stocks in the S&P500, only Microsoft (MSFT) and Amphenol Corporation (APH) outperformed the broader index on a “risk-adjusted” basis
Our financial advisory takeaways and thoughts
When advising clients on their RSUs, we frequently ask this question to clients: “If your company gave you a $10,000 cash bonus, would you take that money and buy stock in your company?”
Overwhelmingly, the answer that we hear most commonly from clients is “no, I would not buy my company shares”. And it’s pretty obvious why. Few tech employees are so bullish about their company that they desire to take cash out of their bank account to buy company stock.
But…those same individuals who said “no” to the above question also frequently ask “should I be selling my RSUs when they vest?”
It’s a bit paradoxical, but we see and hear it a lot. Most commonly because of two key items:
1. A misconception is that holding your RSUs provides a tax advantage (it does not).
We will quickly clarify and debunk this one: There is NO tax advantage to holding your RSUs after they vest
They’re taxed as ordinary income when they vest– just like a cash bonus
2. Inertia and behavioral psychology are at play (selling your RSUs requires that you do something)
The need to take action to sell your vested RSUs is extra effort. While worth it, that extra step can be a big hurdle for many people
This gets amplified by common psychological biases: as humans, we tend to value things that we own more than what we don’t own (known as the ‘endowment effect’)
In this situation – your RSUs become owned stock (not cash). So we start to value that stock more than the cash we’d have if we sold and reinvested in the S&P500. And we start to justify it in our heads. For example:
“This leadership team is solid; I completely trust them” or
“Our sales pipeline is really robust” or
“We have the most talented engineers” or
“This stock really helped me grow my wealth, so I should probably continue to keep it”
TLDR: The psychological hurdle of selling your hard-earned-blood-sweat-and-tears company shares is much more of a barrier than one might think.
We recommend you keep things simple (to ensure you’re investing, not gambling)
Perhaps you can acknowledge your own psychological investing biases. And, perhaps you can acknowledge that the data, above, is fairly compelling.
So perhaps you can also acknowledge that selling your RSUs as they vest and diversifying into a broader index is the simple and (data-supported) better approach in most situations. And, simplicity is often a good thing – both for our mental and financial well-being.
If not, you may want to consider whether you’re “gambling” or investing. Here’s why:
We know from our analysis (and others with similar findings) that the odds are against you in stock-picking (which is what you’re essentially doing if you keep your RSUs)
By keeping your RSUs, you’re implicitly choosing to move forward knowing:
The odds of this being a better outcome are materially against you (e.g. per above, ~28% of companies outperformed; and only 3% on a risk-adjusted basis)
Well-paid professional stock pickers (e.g. hedge fund professionals) – who do this full-time for a living – only typically have a modest 52% to 55% success rate
And despite this data, you’d still like to choosing to “play this game” / not sell your RSUs
To be clear, investing is absolutely different from gambling (especially in the long term). And we’re not saying picking individual stocks is necessarily bad, or that it will turn out negatively. Rather, we’re saying that (1) stock picking naturally has a lot more risk, and (2) much higher odds of underperforming, versus the simple approach of selling and diversifying. So if you opt to do it, you want to (1) do it intentionally (versus because of “inertia”) fully understand the risks you're taking, and (3) have very high conviction in your decision/investment.
Curious as to how your company would have performed?
We’d be happy to share the results. Comment on our LinkedIn post or shoot us a note:
Josh Radman: Josh@PresidioAdvisorsLLC.com
Kris Barney: Kris@3040wealth.com
A quick note on our methodology
We prioritized “simplicity” over “technicality” so that individuals can better understand our thesis without getting lost in the weeds. For example, our “risk-adjusted” return calculation is not a true CAPM calculation, but rather a simplified (annual total return / monthly standard deviation). While we recognize that this may not be the most scientific method, we believe that it’s directionally sound.
Our calculations do not include dividends, since Google Finance (our data source) cannot easily incorporate dividends into stock pricing. We recognize that this could impact some results.
We used VOO as a proxy for the S&P 500 and what clients could have re-invested into.
Our time frame of choice was July 2020 - July 2024. Typically, tech employees receive grants that vest over 4 years so we deemed this an appropriate time frame.
Of the 501 companies within VOO, we used data from 492 of those since those 492 companies all had at least 4 years of data. In other words, we excluded 9 “new” companies that did not have data starting in July 2020 from our analysis.
We assumed a 1-year cliff (25% vest), 4-year vest period, and monthly vest schedule (1/48th vest).
To compare the performance of the “individual stock” vs. the “broader market” we looked at the results of a RSU granted on July 1, 2020 and the impact of holding those RSUs through July 1, 2024 relative to selling those RSUs upon each vest period and reinvesting into VOO.
We ignored the impact of taxes entirely in our analysis. It’s obviously a major item, but it differs for everyone, and for the key item of the analysis (sell and diversify or hold), taxes would have minimal impact
So, you’re a true geek (like us) and want to get into the calculations?
Example Calculations: Visa (V) and Microsoft (MSFT)
If you’re reading this, you’re truly geeking out on the data (and we love that). Here’s a deeper dive into how we calculated our results. We’ll look at Visa (which underperformed the S&P500) and Microsoft (which was one of the few, unsurprisingly, companies that outperformed the S&P500).
In both examples, we start with a $250,000 RSU grant, dated July 1, 2020. The price point of the ticker on July 1 determines the number of shares that will vest after the 1-year cliff and then each month going forward for the next three years.
So, if $250,000 of Visa was granted on July 1 and 25% of that grant was to vest in 1-year, then 323 shares ($62,500) would vest on July 1, 2021 and 27 shares (1/48th of original $250,000 grant) would vest each month afterward.
Note: the Internal Rate of Return (IRR) of the S&P500 (via VOO) is different for each company. As noted above, the amount invested in the S&P500 is based on the value of the company’s vested RSUs in each period. Each company’s stock performance is different and, as such, the amount of money that is generated from the sale of the RSUs each month is also different. For example:
Example: Visa. In July 2021, 323 shares * $235.15 = $75,843 was invested into the S&P500 (via VOO)
Example: Microsoft. In July 2021, 305 shares * $271.60 = $82,962 was invested into the S&P500 (via VOO)
Past performance is no guarantee of future results. This communication is for informational purposes only and is not intended as tax, accounting, investment or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. Your specific situation is unique, and thus your tax situation and treatment in will also be unique. This communication should not be relied upon as the sole factor in making an investment decision. You should consult your tax advisor before making any investment or tax decisions.