How to balance FOMO and loss-aversion in the case of foreign RSUs?
This article gives you a few pointers about what to do with your foreign RSUs that have appreciated a lot in value.
How to balance FOMO and loss-aversion in the case of foreign RSUs?
Posted on 13 Mar 2024
Author: Sayan Sircar
8 mins read
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This article gives you a few pointers about what to do with your foreign RSUs that have appreciated a lot in value.
Disclaimer: Fund names in the article are not recommendations to invest in those funds.
📚 Topics covered:
- Context of the article
- Cases for what the stock does vs what the investor can do
- What actions can you take?
This article answers a question from our Facebook group.
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Context of the article
I’m working in one of the AI company which stock has surged too much in recent AI boom. To be honest almost 2.5-3x. My major holding is now this RSUs. There is a good chance this stock will add another 50% down the ear. My 70-80% capital is this RSUs which is close to 70-80% of money I need for retirement plan at 40s. The amount is in few crs.
Fear and experience says whatever goes UP will come DOWN. But I have seen my colleague who didn’t sell a single share since long time and are dancing. I have sold all my RSUs 4 years back when value was meagre, and invested majorly in Indian market. The last 4 years accumulation turned into big gain because of AI recent boom.
No one selling I see unless investing in land or property. What approach should one follow? Same story for my close colleague.
Let us extract the key details from the query:
- the stock price has gone up recently by a lot creating a lot of unexpected gains
- this gain creates a Fear of Missing Out (FOMO) situation if some shares are sold and the stock goes up further
- simultaneously there is loss aversion in play in case the stock comes down from the current peak
- there is a large amount of concentration risk in the portfolio (“My major holding is now this RSUs”)
Before delving into the analysis, there are two caveats:
No one can predict the future. We cannot predict what the stock will do in the short or long term
For most people, Loss aversion is more real than missed gains
Cases for what the stock does vs what the investor can do
There are only four scenarios here:
| Scenarios | You Sell | You Keep |
|---|---|---|
| Stock Goes Up | Case 1 = 😬 | Case 2 = 🤑 |
| Stock Goes Down | Case 3 = 😁 | Case 4 = 😡 |
Our problem here is to manage Cases 1 and 4. We will assume a ₹2 crore position in the stock.
FOMO - dealing with Case 1: You sell and then the stock goes up
- Upside: The investor has booked a good chunk of profit from the position. If say 20% is sold and the stock goes up 20%, then the lost upside is only on that 20% stocks sold.
- Downside: This is where FOMO is realised since you lost that upside
On the ₹2 crore position, you now have:
₹40 lakhs cash (pre-tax) + ₹1.92 crore stocks (after 20% jump)
The share sale, for foreign stocks, will be taxed at
- slab rate i.e 30% or more (held short-term i.e. sold before 2 years)
- 20% with indexation (held long-term i.e. sold after 2 years) unless you offset that via Section 54F by purchasing a house
Loss aversion - dealing with Case 4: You keep and then the stock goes down
This case is worse compared to case 1.
- Downside: If stock falls 20%, the entire position falls by 20%.
- Upside: none
On the ₹2 crore position, you now have:
₹1.6 crore in stocks (20% fall) and no cash since you did not sell
Lowering loss - dealing with Case 3: You sell and then the stock goes down
This case is not as bad as Cases 1 and 4. If you sold only partially and the stock went down, then you have some cash and a lower position. Assuming a 20% fall and a 20% sale before the fall you have, out of the ₹2cr position:
₹40 lakhs cash (pre-tax) + ₹1.28 crore stocks (after 20% fall)
Mega profits - dealing with Case 2: You keep and then the stock goes up
This one is a simple one. You do nothing and the stock goes up 20%.
The ₹2cr position is now worth ₹2.4cr
In summary, with a 20% move in the stock (up or down) with a 20% sale if sold,
| Scenarios | You Sell 20% | You Hold |
|---|---|---|
| Stock Goes Up 20% | ₹28L cash + ₹1.92cr stocks | ₹2.4cr stocks |
| Stock Goes Down 20% | ₹28L cash + ₹1.28cr stocks | ₹1.6cr stocks |
So we can see that the cases where the stock rises, the end result differs only slightly due to lost profits and tax on the sale (around 10% of the position assuming 30% tax = ₹12L of the sale amount)
However, if the stock goes down and you sold before that, you might be worse off due to the tax on the sale.
To understand how to deal with such a stock position:
What actions can you take?
There are a few things that can be done:
Sell a small part (x%) of your holdings for a few month
Here x can be 5-10%. After 3 months, the position will be pared by 15-30%.
You can use that cash to:
- Reduce concentration risk in the portfolio: Rotate into VT/VWRA (Total World Stock Market ETFs) or VTI/SPX (US broad market ETFs) or even the QQQ (Nasdaq 100 ETF) or equivalent funds for diversification
- This action manages the FOMO of Case 1 well since you have cash to show for it. The impact of a wrong decision depends on the choice of how much you sell
There will be a substantial tax hit as explained above.
Sell a small part of your holdings to book immediate profit
Here you sell x% percentage of holdings now and then do nothing. x = 20-50%.
You can rotate into ETFs (for diversification) or real estate (to reduce tax). You do lose some upside in case the stock goes up but some cushioning will be there based on the performance of what you invested in after selling the stock.
Do nothing for 1 more month
If the stock does go down, and if you were not planning to sell a lot, then depending on how old the vested units are, you might be better off not selling.
Staggered exits based on price movement
You can make a rule:
- Exit x% shares on y% up movement in the stock - you are periodically booking profit
- Exit x% shares on y% down movement in the stock - you will feel sad initially due to the notional loss
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This post titled How to balance FOMO and loss-aversion in the case of foreign RSUs? first appeared on 13 Mar 2024 at https://arthgyaan.com
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