In personal finance (as well as life in general), there are going to be many decisions to make and the choice won’t always be an easy one. So when it comes to investing, it’s important to have an over-arching strategy that will help guide those month to month decisions of what to do with your money.
Our investment strategy can be summed up as: Utilize a broadly diversified stock portfolio (via index funds) to match average long term market growth with the goal of allowing us to become financially independent in our 30’s or 40’s.
We didn’t come up with this overnight, but developed it over the course of a couple years as we consumed a huge amount of financial books, blogs, podcasts, and more. The great news after all of this research is that a simple strategy like ours is not only effective, but it may very well be the optimal strategy.
With that piece of information in mind, I’m going to walk through a specific investment decision we made regarding stock compensation and whether or not we regret that decision knowing what we know now.
Setting the Stage
For this analysis, it’s relevant to note that up until we both quit our jobs to travel across the country, I spent ~4.5 years working for Amazon in Seattle. Previously, I’ve only mentioned that I worked for a “big tech company” to retain some sort of anonymity (which didn’t work), but the specific company will be important in this case.
Part of my compensation while working at Amazon was in the form of Restricted Stock Units (RSUs). Basically, I was “granted” a specific amount of AMZN stock both when I joined the company and during annual performance reviews which would then become mine 2-4 years later when they “vested”.
Many tech companies use this kind of delayed compensation in order to incentivize employees to stick around for a while (with mixed results), because if you leave the company before the RSUs vest, then they are gone forever.
Ignoring Bonuses Before They Happen
I tried to pay little attention to any RSUs that were granted, but not yet vested, and I would recommend to most people with this form of compensation to do the same. The last thing you want to do is make a major purchase or life decision based on this potential future income and have the entire thing collapse around you when something unexpected happens.
Unfortunately, not everyone shares this philosophy and the banks right next to Amazon’s HQ were happy to grant sizable personal loans with these unvested RSUs as collateral…
However, once the RSUs vested, we had a decision to make: Do we keep the company stock or liquidate it for something else?
By the time any stock of significant value vested, we were already committed to the pursuit of financial independence (FI), so a potential third choice of selling the stock to spend the proceeds was eliminated in our minds. Our regular paychecks were more than sufficient to pay for our lifestyle and we were disciplined enough to not treat these periodical bonuses as anything other than more money to put towards our future.
Our “Smart” Investment Decision
I don’t remember where I first saw this advice regarding RSUs, but it’s stuck with me ever since:
Treat any grants of stock as a cash bonus of their equivalent value and then ask yourself: “If I was given a cash bonus of this amount, would I use it to buy company stock?”
Just because the compensation is coming in the form of company stock doesn’t mean it’s not the same as a cash bonus. Stocks are easily liquidated and should be treated just like cash for the purposes of making a decision.
The other thought that stuck with me through years of receiving stock as compensation was the idea of diversifying beyond just our investment portfolio. In addition to any possible stock holdings, we were also indirectly invested in the success of Amazon through both future income and our home.
The size and location of a company like Amazon has a tremendous amount of impact on the price of local real estate. With our house being a significant portion of our net worth and the expectation that our future income would be coming from Amazon, it seemed unnecessarily risky to “triple-down” by also tying our investments to the exact same company.
So we made the decision to sell any AMZN stock that vested and immediately diversify it into a broad market index fund (like VTSAX) that matched our overall investment strategy.
The -$180,000 Result of That Decision
Of course, if you follow the performance of individual stocks, you may be aware that Amazon as an investment has blown the index out of the water over the past 5+ years!
Looking back at my compensation history, I netted ~202 pieces of AMZN stock over the course of my employment which I then converted to ~2,827 pieces of VTSAX as they vested. The price of the AMZN stock at vest ranged from $325-1,160 during my time there (I would like to take some credit for the growth 😉 ).
Looking at today’s market prices, 202 shares of AMZN would be worth ~$382k while 2,827 share of VTSAX would be worth ~$202k, hence the -$180k result above.
The amazing thing is that VTSAX didn’t even do poorly, growing ~46% during this timeframe, it’s just that Amazon happened to be one of the fastest growing stocks across the entire market during that stretch!
So the question is: Did we make the right decision?
Note: I didn’t include reinvested dividends in the VTSAX portion because that would be a ton of work (AMZN has no dividend), so the actual difference may be closer to ~$170k
Reviewing Our Investment Choice
With perfect hindsight, would we have kept AMZN instead of diversifying out of it? Of course! But you can’t look back at the success of your decisions simply based on the result, hence the title of this post.
Knowing everything that was possible to know at the time, I would still make the exact same decision today. Tying the vast majority of our income and investments to the success of a single company is closer to gambling than smart investing in my opinion. Can you get rich doing it? Sure, but you could also end up losing it all in a worst case scenario like Enron.
Plus, if we’re going to pretend to have perfect hindsight, then I should have sold all of the Amazon stock and bought Netflix instead! There will always be something “better” to invest over any given timeframe.
I think it’s important to review the results of your decisions, but it’s even more important to look at those results through the correct lens.
This type of scenario shares a lot in common with poker at a professional level. When you are making an income from playing thousands and thousands of individual hands on a regular basis, the players are forced to become fairly numb to the results of any given hand, and instead focus on the decisions they made during that hand (typically focused around Expected Value or EV) to improve going forward.
Correctly deducing that your opponent has a worse hand than you and betting aggressively leading into the final card is still the right decision, even if the other guy got a huge break to end up with the pot.
The goal of investing, just like poker, isn’t to win any individual stock pick or hand, but to come out ahead in the aggregate over the long run. Focus on the kind of repeatable decisions that help you reach your goals, not the result of any specific one of them in the short term.
If I end up at another company that pays me in the form of stock, you can bet I will be making the same decision to diversify into the index instead. Will we always come out ahead with that decision? No, as you can see above, but it will enable us to reach our goal of FI at a young age nonetheless.