Spring Document Cleaning

Spring Document Cleaning

It’s spring, which means it’s time for some spring cleaning—and this spring’s focus is paperwork. I don’t know about you, but I don’t love paperwork. I’ve spent years working toward zero paper, and I’m now finally down to a handful of documents. I’ll share some tips below so you can minimize your paperwork, too!

Document delivery

If you’re tired of getting statements for your accounts or bills in the mail, try signing up for e-delivery instead. This will help save time and energy opening and sorting mail and having to dispose of it as well. Don’t forget to proactively visit the proper websites to check those statements and pay those bills.

Document retention

We all know we need to hang onto certain tax, asset, and legal documentation, but sometimes the specifics can be tough to remember. Here’s a quick list of the most common situations where you’ll need to keep documentation. Please see this checklist for a detailed list.

Income tax returns

Keep at least three years of state and federal tax returns and supporting documentation on file. Supporting documentation includes records that prove any income, deductions (including medical expenses), or credits claimed (W-2, 1099, end-of-year statements from banks and investment accounts). Depending on the state (like CA), you may need to keep tax returns for longer than three years. If you think you forgot to report income and it’s more than 25% of your gross income, keep six years of tax returns. If you are claiming a loss for worthless securities or bad debt deduction, keep records for seven years.

Investment accounts or bank accounts

Consider keeping the most current statements on file and the end-of-year statement until you complete your tax return.

Retirement accounts

Consider keeping documentation on any contributions, withdrawals, and conversions. If you made non-deductible traditional IRA contributions, keep Form 8606 until the account is fully withdrawn to track cost basis.

Debt (student loans, mortgage)

Keep the loan documents until the loan is paid off. Once the loan is paid off, keep documentation proving that the loan has been paid in full.
Property (automobiles, real estate). Consider keeping any deeds, titles, settlement statements, or bills of sale until you sell the property. Keep documentation showing purchase-related fees that were capitalized until you sell the property.

Home improvements

Keep any receipts related to home improvements as they may be used to substantiate any adjustments to the cost basis for your property.
Insurance policies. Keep the most current policies on file.

Estate plan

Keep a copy of your Will, Trust(s), Powers of Attorney (General and Healthcare), Living Will or Healthcare Directive, and beneficiary designations on file, and store the originals in a safe place.

Document storage

To reduce your paperwork, try storing these must-keep documents on your secure personal computer. Of course, with this storage method, it’s important to back up your electronic files and have firewall protection.

Document disposal

Please remember to shred any documentation that contains sensitive personal information, such as your Social Security numbers or account numbers. A personal shredder should do the trick and will be less expensive in the long run if you’re disposing of documents each year.

Password organization

How are you currently storing and keeping track of your passwords? I recommend using a cloud-based password manager like LastPass where you can store all your passwords in one place and only need to remember the “master” password to access them. LastPass has a random password generator to help you create complex passwords that are more difficult to hack. LastPass also offers two-factor authentication and doesn’t allow your “master” password to be reset to keep your account secure.

Digitize your photos

Does your paperwork include old family photos you’ve been meaning to digitize? Try sending them to a digitizing service like Legacy Box where they’ll scan and save them to a thumb drive, DVD, or the cloud. Legacy Box works with tapes and films, too. While this service may seem pricey, it might be worth paying someone to digitize those photos as they are priceless memories and should be backed up sooner rather than later in case something happens to the physical copies.

Inform your family

Make sure your family knows where you keep your documents and what your “master” password is in case something happens to you. This is especially important for estate planning documents. Having these conversations ahead of time will help alleviate the stress on your loved ones of not knowing what to do or where to find things.

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.


To Exercise or Not to Exercise: What to Do When You Have Options in a Private Company

To Exercise or Not to Exercise: What to Do When You Have Options in a Private Company


Working for a startup or a smaller private company can be exciting. You may be creating cutting-edge technology or providing services or products that will fill a need within an industry. It also means you may have the opportunity to become a significant stakeholder in your company before a single share of stock has been sold to the public. If you’ve been granted options in a private company, you may be asking yourself, “Is the potential reward of exercising my options worth the risk?”

This answer is a complicated, nuanced one that will depend on each individual and the company’s circumstances. That being said, I’ve done my best to distill some of the most important lessons learned in helping clients navigate whether to exercise options in their company while it is still private.


Never invest more than you’re willing to lose.

Your company is doing great things and you strongly believe that you’re moving in the right direction. You wouldn’t have chosen to take the risk of working for this company if you didn’t believe so. The inconvenient truth is that so many bright, promising startups or private companies fail each year. A lot of this has nothing to do with the company itself but is simply the result of factors outside its control—like the general market conditions at the time the company was anticipating raising another round of funding.

Before your company goes public or has a liquidity event, there isn’t a readily available market for you to sell any of the shares you received when you exercised. Until your company has actually gone public, there is a reasonable risk the shares you hold from exercising could be worth nothing. Companies are also taking longer and longer to reach a point at which they are ready to go public or IPO. You must go in with an expectation that you could be waiting 10 or more years for the opportunity to sell your shares in the open market. If the possibility of losing 100% of your investment makes your palms sweat, you likely will want to wait until your company is actually public before you exercise your options.


Do take on an amount of risk appropriate for your situation.

It is important to understand the risks and the worst-case scenario of exercising options in a company that is not yet public. On the flipside, exercising options in a private company can have tremendous outcomes for those who were able to buy in at an earlier stage. Before deciding how much to exercise in your company while it is still private, first take a look at your list of financial goals and priorities:

  • Do you have a sufficient emergency fund of at least three to six months of expenses set aside in cash in a savings or checking account?
  • Are you maximizing savings into the retirement accounts available to you? Have you evaluated whether you’re on track to meet your target retirement date with your current rate of contributions?
  • Are you saving enough for other major goals like your kids’ future college expenses?

If you can say yes to all these questions and are willing to accept the risk, then by all means, allocate a certain portion of your income or savings toward exercising options in your company. It is almost always much less expensive to exercise options while your company is still private than after it has gone public. This is because the valuation (409a) while the company is private is usually much lower than the price at which the company will be valued once it is public. A significant increase in valuation will mean a much larger tax bill per option that is exercised.


Understand the tax consequences.

Options are complicated. The type of options you receive will dictate your exercise strategy and the resulting tax implications. You cannot simply look at the cost to exercise as your total cost to purchase shares in your company. It is important to be aware of your company’s most recent 409a valuation, which will determine the amount of income you are recognizing each time you exercise an option. You will be paying tax on income for shares you still cannot sell and may not have an open market for anytime soon. Exercising stock options without fully understanding the tax impact could mean receiving a surprise tax bill and not having enough cash set aside to cover it.

If you exercise Non-Qualified Stock Options (NSOs), your company will withhold 22% of the income recognized for federal taxes. This may or may not be enough to cover your total tax liability for the exercising depending on the amount and makeup of your other income. You’ll want to estimate the additional taxes you may owe due to the exercise of NSOs and make estimated tax payments or set aside enough funds to cover the tax liability when you file.

If you exercise Incentive Stock Options (ISOs), your company will not withhold any amount for federal taxes, and you will be expected to cover the entire tax liability through estimated tax payments. Incentive Stock Options can also create what is called Alternative Minimum Tax (AMT), which is complicated to calculate and track on an ongoing basis.


Ask for help.

There are certain projects in my home I’m willing to tackle and certain projects I’m more than happy to hand off to professionals. Paint the guest room? No problem. Rewire and update the electrical in my kitchen? You better believe I’m leaving that entirely up to the capable hands of a licensed electrician.

When we talk about options, and especially options in a private company, we are entering a territory where the DIY approach can fail you miserably. Employ the help of a finance or tax professional who has expertise and experience navigating private company stock option strategy. You don’t want to be in the position of wondering why you have tax bills that are much higher than what you were expecting or realize that failing to file a form by a certain deadline is going to cost you thousands of dollars in the future. A qualified professional can help you determine the appropriate amount of risk to take, given your current financial situation and goals, while providing peace of mind that there are no major tax surprises on the horizon.

Is your company the next Apple? I have no idea. What I do know is that the future rarely plays out exactly how you expect it will, for better or for worse. All we can do is make our best calculated bet with the information and resources we have at the time. After that, all that’s left to do is embrace the adventure.



Disclosure: The material is presented solely for information purposes only are not intended to provide specific advice or recommendations for any individual. The information presented here has been gathered from sources believed to be reliable; however, Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal, or accounting advice, and nothing contained in these materials should be relied upon as such.


A Guide to Average Home Maintenance Costs

A Guide to Average Home Maintenance Costs


Purchasing a new home involves a great deal of money, especially if you remain in the same house for years. To keep your home systems and appliances functioning smoothly, you also need to spend money on maintenance. This blog will help you understand the average home maintenance costs and how you can reduce them significantly.


What Is the Average Home Maintenance Cost?

According to a survey by the National Association of Home Builders in 2019, the typical cost of minor repairs and regular maintenance is $950 per year. This amount is based on the average single-family house and is subject to change based on several factors. For instance, the cost does not include expensive repairs and maintenance of items like the roof, swimming pool, HVAC, and other significant home features. Additional factors that can swing the cost of maintenance include the location of your house, the area of your house (in square feet), and the size of your family.


How Much Should You Budget for Home Maintenance?

A general rule of thumb states that you should keep 1% of your house value as a fund for general maintenance. For instance, if your house costs $500,000, then you should be prepared to pay up to $5,000 for maintenance. However, recent trends indicate that a growing number of homeowners are keeping aside up to 4% of their house value in their maintenance fund.

Another method, the square footage rule, states that you should keep $1 per square foot of your house for maintenance. Thus, for a 3000-square-foot property, you can expect $3,000 for maintenance. However, this method does not factor in the age, location, or the condition of your house.


What Are the Activities Included in Maintenance Costs

At times, people get confused between repair costs and maintenance costs. Maintenance of your house includes activities to keep your house clean and maintained. It also includes activities that allow seamless functioning of your appliances and home systems. Wondering what these are? Here’s a list of few of them:


  1. Cleaning the home deck or patio
  2. Lawn services
  3. Sidewalk and driveway maintenance
  4. Cleaning the gutters and vents
  5. Servicing your HVAC
  6. Maintaining faucets and sinks
  7. Maintaining the central heating system
  8. Lubricating garage door springs
  9. Pest control and inspection
  10. Regular maintenance of kitchen appliances


These maintenance activities are not very costly and can be managed using maintenance savings. However, the house itself might need repairs. Repair costs for fixing roofs, HVAC, structural defects, water heater, and the like can quickly add up. The excess of your maintenance funds can be used for these emergency fixes.

You can also assess the repair costs and set aside some money for such unexpected expenses. Alternatively, you could purchase a home warranty plan that covers these repairs and replacements of home systems and appliances. Check out the best home warranty companies offering reliable services. Your home deserves the best!




When you buy a house, don’t just consider the down payment, taxes, and renovation costs. Also include the annual maintenance costs. These are recurring charges you need to pay along with your house. There is no definitive range or rule that can exactly anticipate how much you might have to spend, so do what you can to be as prepared as possible.



Written exclusively for Merriman.com by Sophie Williams.
Sophie Williams is a professional content marketer. She leverages analytical skills from a STEM degree to give an edge to her passion for writing. She is always thinking about how to produce engaging content for her readers. She enjoys finding ways to minimize her living costs and help other struggling homeowners with the same. She also loves writing long rants on books and movies.


Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. All opinions expressed in this article constitute the judgment of the author(s) as of the date of this article and are subject to change with notice. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.

Is Now the Right Time to Buy a Home?

Is Now the Right Time to Buy a Home?


Since the beginning of the COVID-19 pandemic in 2020, it seems that Americans have been clamoring over one another to achieve a core component of the American dream: homeownership. And this phenomenon isn’t surprising; people have spent more time at home than ever before, and the obstacles to buying have dropped significantly. I’ve been asked more and more by my clients whether now is the right time for them to buy.

Unfortunately, the answer to this question is not a cut-and-dry yes or no. Homeownership is a commitment that shouldn’t be taken lightly, and there are multiple items to consider before making a decision.


Interest Rates

When I speak with potential homebuyers, one of the top reasons they feel an urgency to buy now is due to historically low interest rates. And they are not wrong. As shown in the below chart, 30-year fixed mortgage interest rates in the past year have been at their lowest ever since Freddie Mac began tracking them in 1971.

Source: https://www.macrotrends.net/2604/30-year-fixed-mortgage-rate-chart


While some may think that saving 1% on their mortgage rate isn’t a big deal, the truth is that it adds up quickly. Let’s say a homebuyer is comparing two 30-year fixed mortgages for a $500,000 loan amount, one with an interest rate of 3.0% and the other with an interest rate of 4.0%. At first glance, the monthly payments may not look too different: $2,108 per month for the 3.0% loan and $2,387 per month for the 4.0% loan. However, over the course of 30 years, this difference adds up. Over the life of the loan, the 3.0% rate will cost $258,887 in interest paid. Alternatively, the 4.0% rate loan will cost $359,348 in interest. That’s a difference of over $100,000 in interest paid over 30 years!

I certainly understand the concern as it relates to interest rates: How long will the rates stay this low? Since most lenders will not allow you to lock in your rate prior to your offer being accepted on a home, homebuyers are feeling the pressure to buy as quickly as possible. On March 16th, 2022, the Federal Reserve announced its first rate increase since 2018 of 0.25%, with additional interest rates increases on the horizon. While some may take this as a sign to buy a home as soon as possible, it’s important to keep in mind that the Federal Reserve is not required to raise interest rates, and there is still a possibility that they could change course.


Down Payment

For many homebuyers, the question of how much cash they should put toward their down payment is often top of the list. Historically, most buyers have targeted a down payment of 20% of the purchase price. Why? you may ask. Lenders have discouraged homebuyers from putting down less than 20% as it reduces the lender’s risk in case the homebuyer stops paying their mortgage.

To encourage buyers to put down at least 20% of the purchase price, most lenders charge Private Mortgage Insurance (PMI) to those who do not meet the threshold. The average range for PMI can cost between 0.58% to 1.86% of the original loan amount per year, depending on the homebuyer’s down payment, loan amount, and credit score.2 To put this in dollar terms, if a homebuyer had a $500,000 mortgage and was subject to a 1.00% PMI rate, it would cost them an additional $417 per month.

Though PMI is clearly a cost to be mindful of, recent years have shown more buyers opting to put less than 20% down. From 2017 to 2020, 33.6% of 30-year mortgages carried PMI. This is a sizable increase compared to the share of PMI mortgages from 2011 to 2016 at 25.5%.2

It is also important to keep in mind that a homeowner is not obligated to pay PMI for the life of their mortgage. Once their equity in the home is over 20%, the homeowner can work with their lender to have the PMI cost removed. Equity ownership in a home is not just linked to the amount paid, though. If a homebuyer purchased a home for $500,000 and the home appreciated in value to $550,000, they will have an additional 9% in equity compared to where they started.

Why should someone take out a mortgage with PMI? One of the top reasons is to maintain enough cash in emergency savings. Once the home purchase closes, the buyer is responsible for all maintenance costs—emergency or otherwise. If one must choose between paying PMI and having a sufficient emergency fund, I will almost always recommend prioritizing the emergency fund. Having enough cash on hand to support unexpected costs serves as the foundation (pun intended) for all prudent financial plans.



From speaking with your friends or listening to the news, you may think that everyone has bought a house in the past two years. Your intuition isn’t completely off-base; data from the US Census shows that homebuying peaked at the end of 2020 and beginning of 2021.

Source: https://www.census.gov/construction/nrs/index.html > Current Press Release (Full Report and Tables)

The increase in homebuying in recent history has unsurprisingly led to increased competition and sales prices. According to Redfin, in July 2021, the average home sold for over 102% of the list price.3 This was the height of sale-price-to-list-price ratios since the beginning of 2020. More recently, January 2022 has started off with the average house selling for 100.3% of the list price.

While this is a promising sign that competition has slowed down from its height, the housing market is still quite competitive. This often leaves homebuyers feeling the pressure to make a quick decision and offer over the asking price.



In addition to the factors mentioned thus far, there are other considerations to keep in mind when purchasing a home. Do you intend to live in the house for at least five years? Do you have enough cash outside of your emergency fund to pay for routine and unexpected maintenance? Are you ready for the responsibility that comes with owning a home? If not, maybe renting a house is a better option for you.

At the end of the day, choosing to buy a home is a significant financial decision that impacts many facets of your life. If you are left wondering where a home fits into your financial plan, our advisors at Merriman is happy to help you assess your options. Additionally, if you are a first-time homebuyer, please check out our Guide to the Homebuying Process.


1 https://www.wsj.com/articles/fed-minutes-reflect-growing-unease-over-high-inflation-11641409628
2 https://www.urban.org/sites/default/files/publication/104503/mortgage-insurance-data-at-a-glance-2021.pdf

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable; however, Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal, or accounting advice, and nothing contained in these materials should be relied upon as such.

Let’s Talk About Passwords and Password Managers

Let’s Talk About Passwords and Password Managers


In today’s world, password security is part of our financial security. As financial advisors, we’re very aware of this and take measures to protect our clients every day. However, we also want our clients to take measures to protect themselves. One of the ways you can protect yourself is by getting a handle on your system for passwords and how you store them.


Use Complex Passwords

Let’s first review what a complex, secure password looks like. Passwords should be:

  • At least 16 characters long if possible
  • A variety of numbers, symbols, and upper- and lower-case letters
  • Nonsensical if you’re using words, i.e., they shouldn’t be phrases or guessable based on your personal information
  • Unique, i.e., you shouldn’t use the same password for multiple sites


Add Additional Security Layers

On top of creating a complex and secure password, we also encourage clients to add additional layers of security with financial logins. Here are some of the additional layers you can add:

Security Questions. When filling these out, use answers that are nonsensical so hackers can’t look up your information such as where you went to elementary school or what your mother’s maiden name was.

Two-Factor Authentication. Sign up for two-factor or multi-factor authentication if offered, which requires you to enter a code from a text, call, or email, or from an authentication app on your phone every time you log in. This helps prevent someone from accessing your online platform by guessing your password or running a password cracker.

Verbal Password. You can add a verbal password or pin at most banks for an added layer of security in case someone tries to call in as you. Each time you call in, you’ll be asked for the verbal password or pin to confirm your identity before any data is shared or any transactions are placed. Many financial advisors will also allow you to use a verbal password. Of note, your verbal password or pin shouldn’t be personal information that a hacker could look up and guess.

Review Financial Statements. We highly recommend reviewing financial statements for your accounts and credit cards to be sure there aren’t any strange transactions as hackers now process “test” transactions for normal looking purchases. For example, someone ran a $17.99 transaction for Netflix on my credit card; however, I’m not the one in my family that pays for Netflix, so I notified my credit card company of this strange transaction after reviewing my statement.


It can be hard to get started with making these changes to our current password system—until we are forced into doing so. A few years ago, I had someone hack the non-complex and unsecure password that I used for many of my logins, so I ended up spending hours tracking down logins and changing passwords. It was a painful process, and I wouldn’t want anyone else to have to go through the same. I encourage you to get started before this happens to you; at a minimum, work on these changes for your financial accounts now and then perhaps do the same on a rolling basis for your other logins.


Use a Password Manager

Part of why it’s hard to get started on these changes is not having a secure, organized storage solution for your passwords. Historically I’ve seen people use a Word document or Excel spreadsheet to catalog these; however, cloud-based password managers have been available for a while now. There are several advantages to using a cloud-based password manager. Password managers:

  • Allow you to store all your passwords in one organized and easy-to-search place
  • Only require you to remember one password
  • Are encrypted, so they keep your information secure
  • Are cloud-based, so your data won’t be lost if you lose a device
  • Can auto-generate complex, secure passwords for you
  • Allow you to store nonsensical security question answers
  • Are accessible from multiple devices, such as your phone and computer
  • Can auto-fill your passwords for websites on your phone and computer like your browser does
  • Allow you to share passwords with family members
  • Don’t have a password reset option to add another layer of security


If you’re interested in using a password manager, check out Last Pass, 1Password, Dashlane, and Keeper. We use Last Pass here at Merriman and have included a visual of Last Pass’s example “vault” below.

If you’re worried about potential password manager hackers, think about adding a fake letter or digit to all your passwords and know that you’ll need to go delete that specific letter or digit when you enter your passwords. Also keep in mind that additional security layers, such as two-factor authentication, should keep hackers from being able to login easily with just your password.

Passwords are very important for your financial security. It’s not a matter of if—it’s a matter of when someone hacks your login information. By taking some of the steps outlined here, you can make it much easier for you to manage your passwords while at the same time making it massively harder for hackers to access your online logins and information.

As advisors, we not only help our clients with their investments and financial plans, but we also help them understand the current cybersecurity landscape and how to keep their information safe. If you have any questions about your financial security, please don’t hesitate to reach out to us. We’re always happy to help you and those you care about!


Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.


The 5 Biggest Financial Planning Mistakes Made by Tech Professionals | Recap

The 5 Biggest Financial Planning Mistakes Made by Tech Professionals | Recap


I love working with the tech community. I started my career at Microsoft and have since been inspired by the creative and innovative minds of folks working at tech companies large and small. I also enjoy working with tech employees, because as a personal finance nerd, I get to help people navigate the plethora of benefits available that are often only available at tech companies. Between RSUs, ESPP, Non-Qualified or Incentive Stock Options, Mega Backdoor Roth 401(k)s, Deferred Compensation, Legal Services, and even Pet Insurance, it is the benefits equivalent of picking from a menu of a Michelin three-star-rated restaurant.


Through my own experience as a tech employee and my experiences now as an advisor working with tech professionals, I’ve identified some of the biggest financial planning mistakes that can hold the tech community back from achieving financial independence and success.


Mistake #1 – Not Optimizing Benefits


We all are familiar with the paradox of choice. Most people, when faced with a long list of complicated benefits that even some financial professionals struggle to understand, will focus on the areas that are familiar and disregard the rest. Who wants to spend their free time reading about ESPP taxation or the mechanics of Roth Conversions on after-tax 401(k) contributions? Chances are that if you work for a growing tech company, you have very little free time to begin with.


While it may not be the most enjoyable use of your evenings or weekends, I can’t emphasize enough how valuable it is to invest the time to learn how to optimize your benefits now. Choosing to invest additional savings in your Mega Backdoor Roth 401(k) over a taxable brokerage account may shave a couple of years off your retirement date. Maximizing HSA contributions and investing the growing account balance can provide for a substantial amount of money to pay for high healthcare costs if you retire before you are Medicare eligible (age 65). Making strategic Roth Conversions during lower income years, such as in early retirement or during breaks from paid employment, can save hundreds of thousands of dollars in future taxes over the course of your lifetime. The list goes on, trust me.


If I don’t exercise for a week, or even a month, I probably won’t notice a significant difference in my overall health. If I keep telling myself that I’ll start a workout routine, but years go by without investing my time and energy into making the plan a reality, my physical fitness will take a toll, and I will also lose out on all the amazing benefits that exercising regularly provides. I may look back with regret at some point later in life that maybe certain health issues could have been minimized or prevented if I had spent the time to prioritize what is truly important. It is critical to think beyond how something may impact us in the short term and recognize the long-term impacts of choosing to continue to put something on the back burner. Ask yourself, what impact will this have on my life if I wait a year to prioritize my personal finances? What effect will it have on my life if I wait ten years to prioritize my personal finances? Chances are that impact is even greater than you think.



Mistake #2 – Building and Maintaining Concentrated Stock Positions


I consider a concentrated position to be any investment that comprises over a quarter of your investable assets. It can be easy to accumulate a concentrated stock position in the same company that is responsible for your paycheck. If you receive stock as part of your compensation, without a disciplined plan to sell shares on an ongoing basis, you will continue to accumulate more and more company stock. Over the past several years, countless families have become wealthy because of the stock compensation they’ve received and its seemingly never-ending climb in price. While the strategy of holding onto RSUs and ESPP over the recent past has worked out incredibly well, we know that continuing to maintain a concentrated stock position is incredibly risky if you want to ensure you maintain your newly built wealth.


There are two explanations for not reducing a concentrated position that I hear most often: (1) My company has outperformed the rest of the market several years in a row. If I believe in my company and our growth prospects for the future, why would I sell? (2) If I sell my company stock now, I’ll have to pay a significant amount of tax on the gain. Let’s debunk each of these as reasons not to diversify:


(1) Typically, returns of a single stock position are intensely more volatile than the returns of a market index. This can work out in your favor, or it can work to your detriment. Historically, about 12% of stocks result in a 100% loss.[1] In addition, approximately 40% of stocks end up with negative lifetime returns, and the median stock underperformed the market by greater than 50%.1 This means that a few star performers drive the positive average returns of the market. The odds of randomly picking one of these extreme winners is 1 in 15.1 If you’ve been lucky enough to hold one of these outperformers, I encourage some humility around acknowledging that maybe being in the right place at the right time has attributed to your rapid accumulation of wealth.


Companies that achieve such success and become the largest company in their sector may become subject to what is called the winner’s curse. Since the 1970s, data shows that sector leaders underperform their sector by 30% in the five years after becoming the largest company in that sector.1 Over a long time horizon, you are probably more likely to obtain positive investment returns by ensuring you hold the future Microsofts and Amazons of the world through broad diversification, not concentration.


(2) I hate to tell you this, but unless you hold onto an investment until you die, you will have to pay tax on the growth at some point. I encourage people to think of paying long-term capital gains taxes as a good thing, because it means your investments went up and you made money. A surprisingly small fluctuation in stock price can wipe out any benefit of delaying the recognition of capital gains tax. As advisors like to say, “Don’t let the tax tail wag the dog.”



Mistake #3 – Burning Out


There has been a significant decline in Americans’ use of vacation time. Twenty years ago, the average American took almost three weeks of vacation per year. As of 2016, Americans average only about 16 days of vacation per year, almost a full week less. You might think that improvements in technology over this 20-year timeframe would allow us to be more productive and therefore take more time off. It seems that the curse of this increased productivity is a greater reluctance to disconnect from work and give ourselves the permission to unplug.


Taking more time off has a positive impact on your physical and mental wellbeing. For those that need more convincing to submit a PTO request, research has found that those who take vacations are more likely to get promoted than those who underutilize their available time off. Taking steps to prevent burnout can not only lengthen your career and make it more sustainable, but it can also get you an increase in title and a pay increase. If that isn’t a compelling argument for taking a vacation, then I don’t know what is. At Merriman, we want to help you achieve your definition of living fully, whether to you that means taking time off for an epic adventure or maybe you have a larger goal of making work optional.



Mistake #4 – Poor Risk Management


Here are some fun facts for your next socially distant dinner party. If you are a 40-year-old male and you were in a room with one hundred other 40-year-old men, statistically speaking, two of those men will pass away before they reach their 50th birthdays. Another seven will have passed away before they reach their 60th birthdays, and another thirteen won’t make it to their 70th birthday. Close to a quarter of forty-year-old men will die before age 70. Do I have your attention now?


I don’t bring these grim statistics up to scare you. I bring them up because I’ve seen first-hand how a failure to plan for risk and the realities of life can cause significant financial harm during an already emotionally devastating time. Nobody enjoys talking about death and disability, but it is a fact of life that we will all pass on at some point. It is only fair to the people we love that we at least protect them financially.


Estate Planning and Insurance Planning are often the two most overlooked areas in a financial plan for folks that have not worked with an advisor. Financial advisors will also tell you this is often where we see our clients procrastinate the most. There are many things in life that feel urgent but are not actually important. We put off the important items, like drafting an Estate Plan, to answer our emails and do other tasks that have more of an immediate pull on our time and energy. There will always be those items to complete that feel pressing, but try to think through the consequences of not completing your will or obtaining life insurance if, in fact, your time has actually run out.



Mistake #5 – Not Hiring an Advisor


Yes, I get it. Hiring an advisor means paying fees. And hiring a bad advisor can be more harmful than helpful. But just like everything else in life, there can be a lot of value in employing the knowledge and resources of an expert. I don’t cut my own hair for a reason, and I wouldn’t dream of providing my own defense in any sort of lawsuit. If you have a handle on your investments, are rebalancing your portfolio like a pro, and have done extensive research on your company’s benefits and how to utilize them, then by all means, carry on, you fellow financial-planning nerd. I wish everyone fell into this category, but it is rare that I talk with someone who doesn’t need help in at least one major financial planning area.


If you do hire someone, be sure to hire a fee-only fiduciary advisor. You’ll need to explicitly ask this question, and if the answer is no, I suggest you run far, far away. Also, if you’re afraid of commitment, ask what the process and cost is of leaving an advisor if you aren’t seeing value from the relationship. Work with an advisory firm who isn’t going to make it difficult or expensive to end your relationship. Without any significant barriers to exiting the relationship, your advisor will be motivated to make sure you are getting great service and will want to remain a client for years to come. If you’re looking for an advisor you’re compatible with, consider perusing our advisor bios. If you’d like to discuss your situation, don’t hesitate to contact me.




1 Avoid Gambler’s Ruin: Bridging Concentrated Stock and Diversification


Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.