I’ve been failing at creating a spreadsheet that accurately tracks my portfolio performance and compares this to the same investment in the stock market. I’m going to try this a slightly different way… via, not a spreadsheet (which should make it easy but doesn’t) and instead, in the form of a blog post. Let’s see if this works… Continue reading
Apple has been, by far, my largest investment. Here’s a look at how I’ve done so far:
Total invested (all time): $35,070
Total shares owned: 100.89
Average cost per share: $347.50
Sold in 2013: $22,086
Shares Sold: 53
Average cost per share sold: $416.71
Gain per share: $69.21 ($3668.13)
Sold in 2014: $12,640.80
Shares Sold: 25
Cost per share sold: $505.91
Gain per share: $158.41 ($3960.25)
Current invested: $13,100.38
Current # of AAPL shares: 25.72
|Date||Action||Stock||Shares||Cost Per Share||Invested|
One of my informal new years resolutions was to get a grasp on my stock trading in 2014. To start, I wanted to balance my portfolio so it’s less risky and more focused on dividends (thanks to some insight from a reader, I made some significant moves in January I’ll be posting about later.)
This post, however, is about how much money I’ve missed out on in hindsight with poor trading choices. I’m looking only at my taxable Sharebuilder account at the moment. Since 2008, according to my Sharebuilder account history, I’ve made 372 trades.
21 of those were sell orders.
It’s been said a prudent investor should limit the value of one stock to a maximum of 10% of their total portfolio. Usually it’s advised that one is even more diversified, especially if that stock is a small cap. I haven’t found advice about private companies because at that point wealth managers are generally advising angel investors with over $1 Million in networth to their name already. It’s really hard to find good advice for startup employees trying to figure out what to do with ISOs (incentive stock options.)
ISOs are a type of employee stock option that can be granted only to employees and confer a “US tax benefit.” They are also called Qualified Stock Options by the IRS. Tax benefits provided by the IRS are typically designed to encourage regular folk like myself to take minor risks in order to obtain higher value down the line. For example, the IRS allows the average joe to put pre-tax money (up to $17,500 a year) into his 401k, which, theoretically, is taxed at a lower rate during retirement.
For ISOs, the benefit can be huge if and only if the employee takes the risk to exercise early via an 83(b) election and the company does extremely well. The problem is that the risk that the employee is required to take is much, much larger than that of someone investing in a 401k. When you invest in a 401k for $17,500 per year you usually have an array of mutual funds that you can select so you have a diversified investment. If one company goes under, your investment will take a hit, but you won’t be down to $0.
Now, with ISOs, it’s a different story. If you join a company as an early employee you’re often sold the dream of the company hitting it out of the park, and those stock options being worth much more than they’re worth today. That’s how startups entice talented folks to leave big corporations to work for less money and much longer hours. Sure, there’s the flexibility, the excitement of building something new, et al, but if stock options weren’t a key part of that recruitment package they wouldn’t exist in the first place.
Some people do strike it rich on options. But the matter of fact is, 9 out of 10 startups fail. It isn’t clear how many of those 9 startups go to $0 and how many of those 1 in 10 actually return anything significant to common shareholders (i.e., the employees.) I know for a fact that a certain $1 billion acquisition returned around $1 per share to common shareholders, while an acquisition of just a few million over what was raised returned $3 a share to common shareholders. The numbers never make clear sense.
With ISOs, you’re provided the benefit of early exercising. I’ve written a bit about this before, but basically, early exercising means you “get” (benefit) to BUY your shares right away. Why would you want to do this? Well, say you have the option to buy 10 shares for 1 penny each today, even though you don’t actually own any of them until one year down the line because you have 4-year vesting with a one year cliff, standard terms for founders and early employees. This means that whether you buy your options or not, you don’t actually have the right to any of them until one year of service. If you quit before that time, so long options.
But it gets more complicated. After the one year of service, every month you vest a percentage of those options, until year four. The company may or may not be sold or go public during this time. Companies, even successful ones, usually take much longer to go anywhere. Many of them have ups and downs and ups and downs on the way. The ups are great. The downs sometimes include investors coming in to give more money to keep the company afloat while washing away any potential gains of common shareholders. That’s one reason why successful companies may still not even provide expected returns to employees who have worked long and hard for their reward.
So why exercise early? Exercising is actually a taxable exercise. Companies gain value, albeit paper value, as they grow. So if you received 10 options for 1 cents a share in 2013, you can buy them in 2013 for 10 cents a share and pay no tax on these options. Say in 2015 your company is supposedly worth $1 per share. If you want to exercise them at that point, you have to pay tax on 99 cent gain per share. That’s not much. But if you own hundreds of thousands of shares, and the difference between the exercise price and the current value is much greater, you’re looking at a sizable tax bill for assets that are entirely illiquid and may be for the foreseeable future. Long story short, if you want to get any of the potential value out of your stock options, you probably should exercise early if your company lets you. Exercise early and pray.
Now, you’re thinking, why not just wait until a long time in the future when the company sells to exercise my options vs taking the risk today? You can certainly do that. The only problem – and it’s a biggie – is that makes you stuck if you want to leave the company or if you are forced out. You have 3 months (count ’em, 90 days) to exercise your options, or you give them up. At that point, even though the company may be doing well, you are looking at a taxable event if you want any of those options you negotiated so hard for and earned during your tenure at the company. You’re stuck with a psychological battle here — do you buy the options, pay tax on them, because they were part of your compensation package, accepting that they very well will be worth nothing after you’ve paid a heap of tax on them – or do you let them go and accept that one day they might be worth a lot and you won’t see a penny of it?
Yes, that’s the problem with ISOs. Worse yet, when you join a company early on, you don’t have to exercise your options, but when you’re a small team — unless it’s clear you just cannot afford to exercise those options today — people you work with like to see your skin in the game. If you’ve exercised your options, you’re an investor in the company. Yes, your fancy benefit for working for a startup is that you get to pay to invest in a company that has a 90% chance of failing.
The later you join a startup, the chances of failing might go down ever-so slightly, but the cost to exercise the options go up. No matter what, it’s a crapshoot. Like in Las Vegas where the Casino always wins, in startups, the investors always win, even if they lose. Founders have a slightly higher chance of walking away with a piece of the pie, even in a failed outcome, because they have so many shares the investors often want to buy them back from the founder so they can control the company. Founder gets a few million for selling their shares back, leaves on his merry way. Early employees are pretty much fucked.
That’s just the way it is. Few people understand this, or the odds. I joined an early-stage startup and paid $20,000 to exercise my options. Yes, this was a huge risk. Our CEO would rattle off numbers of our shares one day being worth something between $35 and $65 a share in company meetings. He got us all excited because that was his job and at the time we all had to be a bit delusional to grow the company from nothing to something. But I fell for it. I wanted to. I wanted to buy the startup lottery ticket and, while I knew the $65 per share was a long shot, I dreamed of walking away with enough for a down payment on a house. Couldn’t my 100,000 shares turn into $200,000? The fantasy was always $1M, but I kept myself grounded in reality, worked hard, hoped that maybe all my hard work would result in $2 per share. Just $2 per share.
Today, everything has changed. We have a new leadership. There’s no CEO standing up and talking about employee share price anymore. I’m pretty sure that’s one conversation the executive team wants to avoid. And I’m just an early employee who put 10% of her networth into one very early-stage company. If someone came along and asked me to invest $20,000 into a Series A startup today, and if I was legally allowed to, I don’t think I would because the risk is too high.
Angel investors (and VCs for that matter) would never invest in just one risky company and call it a day. For more seasoned executives, buying a chunk of a small company to exercise their stock options may be a much smaller percentage of their portfolio, so that’s a different story and a different risk allocation – what’s 10% of my portfolio could easily be 2% of an executive’s portfolio who has a lot more money and assets saved up.
That said, I encourage everyone thinking of exercising their options to be realistic about the risk involved. It’s not like buying an expensive lottery ticket exactly, or putting it all on roulette red, but there are risks involved, and yes, you can and very well may lose all or some of your investment. Venture Capitalists do not care about employees or their cute little stock. They care about not losing money and making money. If you’re working for a company that is going to raise a lot of money and wants to grow fast (once you take any VC money this is kind of a given) your stock is most likely going to be worth very little to worthless. Unless you happen to hit the jackpot.
In 2013 to date, I’ve decided to do a bit of rebalancing to my portfolio. I really have no idea what I’m doing when it comes to portfolio management, but trying my best to keep my cost ratios down, keep dividend-paying stocks in my retirement accounts (not doing the best at this), and be smartly diversified.
The good news so far is that I’m still “up” this year, but I haven’t effectively ridden up the stock market boom as too much of my portfolio was tied to AAPL, which, as anyone following the stock market knows, is down to under $400 from its high of $700 a share. Should have sold when it was $700 a share and I owned 100 shares, but what can you do if you’re not psychic?
TAXABLE ACCOUNT H1 2013 (TOTAL $65.2k)
BUY — F: continued to purchase Ford stock (should have bought more when it was under $10)
BUY — WFM: bought some more shares, not sure if this is a good move
BUY — HYG: bought about 26 shares
SELL — APPL 53 shares. I was overweight in AAPL and despite their future prospects the volatility was killing my portfolio. First sold some to pay for my car and then decided to sell more. If I understood shorting and calls and puts there might have been a better strategy there than selling the shares, but I’m trying to keep it simple and 103 shares were too many to own out of a $200k portfolio.
SELL — INTC sold all my shares of intel. Trying to diversify out of tech, and took a loss on them to offset apple gains.
HYG — sold the 26 shares I bought earlier in the year to afford the car. Shouldn’t have bought them in the first place.
ROTH IRA #1 (Total $11.1k)
BUY – VTI, 25 shares
BUY – VYM, 42 shares
BUY – XRT – 10 shares
ROTH IRA #2 – VANGUARD ACCOUNT ($23.3k)
TRADITIONAL IRA ($12.7k)
No change. Went with the ROTH this year.
401k #1 ($39.3k)
No matching from my company, but have maxed it out for the second year in a row. Happy to have done this early so as long as I keep my job the rest of this year I’ll see a higher monthly paycheck until Jan 1.
401k #2 ($22.9k)
No Change, should consolidate my retirement accounts at some point. If I go to a grad program or travel the world for a year this is a good time to convert everything to a Roth.
Then I have other funds like my Vanguard Index fund I bought a long time ago directly from Vanguard, my 529 plan I started for grad school or my future children (though I stopped investing in that a while ago and it just has $3683 in it, enough for textbooks maybe.) And, of course, my company stock which I exercised for $20k plus loan interest… which may or may not be worth anything. I like to pretend that my shares will one day be worth $5 a piece so I’ll have over $1M in networth, ideally before 35. It could happen, but still a very long shot. Those shares could also very well be worth nothing, which means $20k down the drain. Stock options, esp ones you’ve exercised early, really mess with your brain.)
The majority of my networth today is tied up in the stock market. It is difficult to understand how much risk one should really take to reach their goals of wealth. It appears that the only way the 99% has a chance of achieving wealth and financial freedom, one must take great risk. Risk that leads to many days looking at your networth going down instead of in the positive direction.
A few months ago, my networth was $183,000, according to my Personal Capital accounts. Today, it’s $159,282, a 13% loss from the highs this year. Granted, I’ve also spent money this year and I started the year with $150,000, so I’m still “up.” But that includes all of the money I’ve put into my investment accounts so far this year as well.
Obsessing over becoming the next Warren Buffet isn’t healthy. But I also don’t believe that mutual fund advisors are better apt to succeed in the markets with my money versus investing in my own diversified strategy. The problem is that despite owning a lot of different stocks and ETFs, I’m not sure how diversified I am.
My idea for my Sharebuilder account, especially my taxable account, was that it would be my play money account vs my IRA and 401k programs, where I’d invest in time-based mutual funds. But now with over $100k in my Sharebuilder account, it doesn’t look like play money anymore.
They say don’t sell when a stock is down, but I don’t believe that either. If a stock has lost 50% it’s time to sell (it’s time to sell before that happens if you see it dropping) and put that money into something more stable. For instance, today my $4000 CBOU investment was down to under $2000. I sold 1/2 of that, giving myself $1000 in liquidity, and invested in AAPL, VZ, and KO (my first investment in Coke.) I’m concerned about investing in dividend stocks in my taxable accounts, but it seems these are the only stocks that have a shot at earning a decent interest income in the future.
I do need a better way to track my spending on investments (both in terms of principal investment and transaction fees) to understand my true gain or loss per year. None of the sites (Mint, PersonalCapital, Yodlee, etc) seem to offer this. Any ideas on how to do this more effectively? I’m sure all the information is stored in my many different accounts, but no one is surfacing to me. Sharebuilder is bad because they only show you how great you’re doing based on the account increases, removing any losses that you have sold off. So I’m “up” 33% this year, but that’s no where near true.
I’m not a day trader, or even a month trader. But I’ve started to realize if I want my portfolio to have any serious upside, I need to rebalance every now and again. I’ve sold off most of my cleantech investments including PBD, ENOC, and COMV, and put that money into a mix of large-cap tech companies (AAPL, CSCO), international funds (HAO, EWZ, EDIV), and food (MCD, CBOU, SBUX, WFM.)
Up until today, I’ve only sold small cap losses that seem to be destined for failure or, at best, growth after years of retreating even further, while that money could be in a large-cap dividend stock earning income. Today, however, I decided to sell one ETF where I have turned a profit.
So long GLD, at least from my taxable account. After making an early $500 investment in GLD I found out that gold, even in an ETF, is taxed at a collectors rate. That means 28% capital gains tax. Instead of letting my $500 sit in my taxable account (it is at about $900 now) I’ve decided to sell the 5 shares and move my investments into other funds that belong in my taxable accounts. And after today’s AAPL earnings news, I’m tempted to put the $900 into purchasing two more shares of the company that made the computer I’m currently writing on and the phone I’ll be making calls on in a few minutes. I only own 70-some odd shares of AAPL stock, my goal is to get to 100 shares before the company hits $500 a share. Since AAPL doesn’t pay dividends, this is the perfect company to hold in my taxable accounts.
Meanwhile, I invest regularly in GLD in my Roth IRA account. It seems GLD is fairly expensive right now (afterall, I nearly doubled my initial investment from just a few years ago) so I might hold on aggressively investing in it. My Roth account is my “play” account, since I can only put $5k in it per year. I put that mostly into high-dividend ETFs and rebalance by adding more funds in new sectors the following year. For instance, this year I’ve already invested about $2k into XLE (oil) and XRT (retail companies) as well as GLD. I only have $3k left for my Roth this year, but I plan to start contributing to my 401k (no match) soon, and trying to max that out this year. I’m hoping for a significant raise, which in the ideal world will be enough to cover maxing out my 401k without noticing those contributions too much, but I’m not sure yet if that’s actually going to happen. Fingers crossed.
In the meantime, I have $900 liquid that I can invest somewhere. Oh goody. I think it’s pretty crazy that I currently have $149339.25 in my investment accounts right now, not counting about $10k liquid (though taxes are going to eat some of that up I think.) Even though $150k doesn’t seem like a lot of money, I’m proud that in the last 6 years since I’ve graduated college I’ve been able to go from $5k in savings to over $160k. Still pushing for that $200k this year — if the economy decides to recover and I manage a sizable raise it will help lift me up there, otherwise I’ll probably end up at $180k for the year. Really would like to see that happen, I’m so set on entering my 30s with $250k in the bank, I’ll be pretty peeved at myself if I don’t make that goal.
I don’t remember the exact day I opened my first Vanguard account, but I do remember the feeling that came with moving $3000 from my just-expired CD (then at a 3.5% or something renewable interest rate) into a Roth IRA. There was some thrill of taking a risk of earning more than 3.5%, and feeling proud that I was acting like a grown up and putting $3000 (a huge chunk of my savings at the time) into an account I couldn’t touch for another 45 years.
It was sometime around 2007 at this point. My yearly income was about $25,000, and I had $15,000 in savings which included the cash my dad gave me to buy my first car and money from a lawsuit when I was young. I could have spent $15k on a car, but instead I spent $7k on a used car and put the rest into savings and CDs. Investing from 2006 to 2011 hasn’t been a remarkably inspiring experience. I’m not surprised that the Millennial Generation doesn’t trust the market, and is afraid of investing. I’m trying to fight the urge to take my savings out of the banks and stock market and stuff my cash in a pillow.
A year or so after opening my Vanguard account, I started to test the waters of more significant investing. I somehow maxed out my Roth IRA that year, bought a taxable Index fund at Vanguard, and started researching other ways to invest any extra income. On 12/31/2007, I had $9,189.07 in all of my Vanguard accounts, and $7000 in a CD. That was the entirety of my investment accounts 4 years ago. At this time, I was paying $1000 a month in rent for a studio apartment, and making $35k a year. I opened my Sharebuilder account in 2008. According to my year-end account statements in 2008, I had $1542.28 in equities and $50.48 in a money market fund, totaling $1,542.28. That year, I earned a whopping $22.13 in dividends.
Read on to see how I’ve grown my investment accounts from $15k in 2007 to $110k in 2011. Continue reading
Working in startups, your pay is always split somehow between salary and “stock options.” If you don’t know what that means — basically an option gives you the option to purchase a share of stock at a low “strike price” of the company. If the company does well, the price of the stock goes up, and if it does really well the nitty gritty details that can make the purchasing of the said stock through the option become less painful to think about. Trouble is, most companies, even good companies, aren’t Facebook or even LinkedIn. So exercising options early could mean to big losses down the line.
There are some tax reasons to exercise options early. From my understanding, if you have ISOs (which I do), you can buy the stock options up front, before they’re vested, and wait a year to sell them at capital gains tax rates. That is, if in a year, or after a year, they’re worth more than they were when you bought them. And that only really makes sense if your company goes public — the odds of a startup going public are very, very small. More likely, even if your successful, you get acquired. And as I experienced at my last startup — an acquisition, even when the founders do well, might not result in a great turnout for the rest of the employees.
So most of my instincts are telling me it would be silly to exercise the options now. Why not wait? Well, my company is likely raising additional funding soon, which means the value of the option will go up. While I’ll still be able to buy the option for the lower strike price, I’ll have to pay tax on the difference between the strike price and the value when I buy the option, which could be quite a lot, especially given that I’d be PAYING for the option and owe money on it. And there’s still a decent chance that eventually it will be worth $0.
Now, I could exercise a portion of my options – take a little risk, and wait on the rest – but it’s not clear this makes sense either. There is a whole issue with AMT that I don’t understand (anyone want to explain this to me?) that you can avoid if you exercise early, so says the Internets. I’m not sure at what point you hit the AMT issue in terms of your yearly gross income.
Besides all of that, the reality is that I don’t really have the $20k I’d need to purchase all of my stock options right now. Well, I do have it — I have $130k in random investment accounts — but I don’t know if it makes sense to pull my funds from any of them to exercise my options. It’s a huge risk. It might be better from a tax perspective if, in a year or a few years we get acquired, but who knows if that will happen. I do believe in this company (which is rare) so that says a lot. Still, I’m relatively risk-adverse when it comes to money. Hmm. What do you think I should do?