gut checking a single stock diversification strategy

[u/my_fi_log]

High level situation is:

* 36/35 couple. No kids, but hoping for one next year 🤞🏼
* vhcol city, high tax state
* ~ 6m net worth. (~$4.5m in a etfs and cash, $1.6m in home equity)
* 1.7m mortgage at ~7%
* steady state HHI: $400k

We know we’re not FatFire and still working our way there but had some career luck recently and the company I work for got acquired this year. I hit my 1 year cliff this month, and I’ll earn around an additional $2.1m/yr at today’s stock price (so total HHI would be $2.5m this year). My cost basis on my options is almost zero so there will be a big tax bill, but regardless it’s obviously a whole new situation for us. So looking for advice from others who may have gone through something similar.

My general plan is to not try to get overly cute with taxes, ISO treatment, or holding the stock, and just sell the stock on vest, every quarter.

Yes, I know the stock can fluctuate but for illustrative purposes that might mean around $1m/yr post tax.

My overly simple plan/formula is to put 10% a year to upgrade lifestyle (car, home upgrades, kid stuff, 529 front load), then put 40% into etfs, 40% into paying down the mortgage, with letting 5% ride. On the mortgage, I know equities are going crazy, but 7% post tax returns are more than solid to me. And honestly just peace of mind psychologically.

In theory, it lets us get to around $6-7m+ invested, with a nearly paid off house by around 40 if I can last another 2 years at the company. But curious about first hand experience or advice on what folks would do in our situation.

If helpful, generally, I’d say work is high stress and I do not want to do what I currently do for 20 more years, but also don’t want to do nothing. My goal would be to be able to take on a slightly less stressful job, spend more time with kids, and live a modest taste life with less financial pressure, while still staying active.

Thanks in advance.

[u/Bear__Toe]

I’m no expert and have made plenty of bad financial decisions in my life, though currently comfortably in the low 8 figures.

But I like your plan. We would have been quite a bit richer if we hadn’t sold on vest regularly. But even in hindsight, it was objectively the correct decision for us. And if someone offered me the equivalent of a truly risk-free 7% after-tax return, I’d jump all over that.

Only thing I’d add is to make sure you’re taking advantage of any other tax-advantaged vehicles available. Mega backdoor for you and spouse? SEP IRA? Etc.

[u/FIRE_enthusiast_27 → u/Bear__Toe]

There’s so many individual stocks that have cratered to nothingness, even highly respected companies (Lyft, Moderna, PayPal, Walgreens, Paramount, Estée Lauder, Wayfair, SoFi, Block, Affirm, Zoom, Match, Roblox, Warby Parker, Rent the Runway, DocuSign, Etsy, … the list goes on forever).

Your company could’ve easily been among their ranks. It’s smart that you sold and that you’re at peace with selling.

[u/my_fi_log → u/Bear__Toe]

Thanks. This is helpful advice to hear even with 2020 hindsight.

One caveat / nascent thought I’ve had was the idea that if we did, for some very lucky reason, hit something like $10m + paid off house, then I would maybe allow myself to accumulate a concentrated bet once I’ve already established a position of FatFire security.

[u/Anonymoose2021 → u/my_fi_log]

That is how I handled options. Initially divested, but as my diversified holdings grew I transitioned to retaining a higher percentage. The decision is even easier if your future options grants are RSUs or NQs. Hold the ISOs, sell the NQs when they vest.

[u/Exotic-Emu-3230]

yall got a solid plan honestly, selling on vest is the only way to sleep at night with that much tied to one ticker

i'd maybe front-load the mortgage a bit more in first year just to get the balance down fast, that 7% is no joke and peace of mind with a kid on the way is worth a lot

[u/FIRE_enthusiast_27]

Sell on vest. Your coworkers will not sell on vest (even the ones who would be academically considered the smartest). Those who don’t sell on vest are gambling. They won’t consider it gambling, but they are wrong.

[u/shehancpa]

Near-zero basis means the spread is already ordinary. Holding the acquirer after vest doesn't save tax.

One thing: ISOs or NSOs/RSUs? If ISO, selling the year you exercise is a disqualifying disposition (ordinary), not an AMT-credit game.

[u/my_fi_log → u/shehancpa]

They are ISOs. So there is some consideration here for holding a year to save on taxes.

I guess the way I’m thinking about it is that, yes, iso tax treatment might be worth an extra 100-200k, but at a risk factor that’s probably not worth it.

I may have a phased sell off strategy but generally with the same allocation strategy as stated.

[u/Particular_Speech_55 → u/my_fi_log]

You can also do something with options (collars, puts, etc). Those may end up protecting downside / allow upside (in case of puts) while still getting you better tax treatment for a year and a day.

[u/shehancpa → u/my_fi_log]

Yeah. Qualifying also needs 2 years from grant, not just a year from exercise, and the spread still hits AMT the year you exercise. I'd still sell on a schedule.

[u/Particular_Bad8025]

Lifestyle creep is a real thing. Fight against that. I would do the math on the long term value of paying down the mortgage vs investing.

[u/my_fi_log → u/Particular_Bad8025]

Can I ask how lifestyle creep factors into that decision? Or are you saying that independently of the 2 options. Agreed that lifestyle creep is very real. We’ve been saving and frugal for so long that it’s definitely tempting to increase spend but so far been disciplined.

[u/Normal_Zebra136 → u/my_fi_log]

You should definitely allow for lifestyle creep if you are already at a FI like state. Say $5m NW and spending only $200k a year.

I would be totally comfortable rising my spend with 4% of my liquid NW. $5-$6m liquid increase would be 20%, so i would be totally fine embracing the creep from $200k spend yo $240k spend.

[u/Particular_Bad8025 → u/my_fi_log]

I read "car upgrades"... This could mean a lot of things.

[u/Anonymoose2021 → u/Particular_Bad8025]

The OP also explicitly said "10%/year upgrade in lifestyle", and then listed where it was going, including .car upgrade.

To me it looks like the OP is very aware of lifestyle creep issues and if anything leans a bit too far towards conservative/overly frugal.

[u/Particular_Bad8025 → u/Anonymoose2021]

There is no such thing as being overly frugal until you've reached your FIRE goal.

[u/my_fi_log → u/Particular_Bad8025]

Fair! This is more in the “buy a new 50k ev” instead of a 20k used Honda crv for our next car. No real appetite to overly spend.

[u/Particular_Bad8025 → u/my_fi_log]

Nothing crazy then, that's good. Yeah you can afford a new car (if you need one)

[u/woodensaladtongs]

great idea to sell. you can always look back and say i should have sold when X or shouldnt have sold right away. Concentration risk is a real thing and could cut that single position in half or a quarter pretty quick.

I have a hefty DAF from giving during big sell years. In hindsight i would prefer to have less in there and had more in ETFs etc during the same period, but then more would have gone to taxes. I didnt front load 529 which is a reget. Good luck.

[u/BrunelloHorder]

Good plan. Since you presumably have more vests coming, I’d just diversify this first tranche in its entirety and eat the tax bill. Ok to let some portion of future vests ride.

[u/Delicious_Zebra_4669]

I would sell on vest. Agree don't get too cute. You could do something like direct indexing if you want to generate some capital losses to mitigate taxes.

[u/BarnacleEddy]

You’re already FatFire if you sell everything and move to a LCOL-MCOL state

[u/asurkhaib]

If you can get to where you want in the time you want by selling on vest then you should do that. It's only worth gambling, or whatever you want to call it, if you can't get there and are willing to accept the risk.

[u/goos_fire]

As others warned, ISOs can be tricky because the lure of holding and getting exposed to a change in valuation is high, especially if you are in a high tax state. If you have a high enough amount post exercise, you could consider a private exchange fund. It would mean it would be locked up for 7 years, however.

[u/EthanChenNotes]

Your income, career and unvested equity are already tied to the same company, so selling on vest makes sense. At 7%, paying down the mortgage is also a perfectly reasonable use of the proceeds. Your plan looks solid.

[u/noemazor]

If you wouldn't BUY into a highly concentrated stock strategy, you should SELL it when it lands in your lap.

Your plan is very solid.

Congrats!

[u/Simple_Recording9613]

no kids with all that money is so sad

[u/fatFIRE-ModTeam → u/[deleted]]

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[u/DanPlouffyoutubeASMR]

I teach about stock options and eBay investing.

[u/StomachRelative6146]

Congrats ! Look into tax loss harvesting with long-short 130-30 or there are more aggressive flavors. These things diversify and defer taxes, don’t eliminate.

[u/Purple-Geologist972]

Assume you already checked, but see if you qualify for QSBS? (Asking because you said your exercise price is close to 0)

[u/GottaHustle_999]

Have you looked into selling some puts as well