Understand when and why you should diversify.
Surprisingly, few sources provide quantitative answers for when to sell a concentrated stock position (e.g. post-IPO).
At times you'll hear “wait for long term cap gains”, but when you are highly concentrated (over 10% of net worth is in a single stock), or if the capital gains portion of your stock value is small, the added risk often isn’t worth waiting.
Two key probabilistic values can describe your future stock performance:
Almost every human is risk-adverse; with the same expectation, they consider lower "volatility" better. Most further are willing to reduce their volatility in exchange for some reduction in expectation. Consequently:
Bogleheads offers a great overview on risk and return. Key points:
However, tax incentives can incentive you to hold. e.g.:
As your concentration lowers, your risk dials down and it makes more sense to hold on to more stock for the tax incentives.
Yes, some IPOs have delivered amazing returns (Amazon and Google), but even this year, there are plenty of examples of IPOs below their open price (Slack, Uber, Lyft).
On average, IPOs, starting at opening date, underperform the market. Just take a look at the Renaissance IPO Index (tracks companies for first 2 years), where there’s long-term (5 years+) underperformance, significantly higher-risk, and always lower performance on a risk-adjusted basis.
I’ve seen first-hand how waiting for long-term cap gains can go poorly. My prior employer, Dropbox IPO'd in March. 2018. Here's the performance (DBX) since the lockout expiry, compared to the SP500 (^GSPC).
Needless to say, it would have been much better to sell at $27.50 with $6.50 in short-term cap gains, rather than $21.80 with $0.80 of long term cap gains!
This article in general compares holding your stock to being in a broad-market index fund, but be advised there’s lots of other asset classes out there (bonds, real estate, international stocks, etc.) that are worth looking into and investing in. Different assets classes are more appropriate depending on how long your investment time-horizon is.
I generally don’t explore “how to invest your windfall” on this page as that’s a general problem independent of the stock concentration problem. Useful resources for you:
So should you sell now or wait for tax advantages to kick in? Calculate when HERE.