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A Time to Rebalance

With the large gains in the stock markets since May/June (and from a year ago), now may be a good time to check if a rebalance is needed. Sell your winners and buy your losers to get your portfolio back to your target allocation.

Rebalancing keeps the risk profile of your portfolio under control and allows you to capture the performance benefits of diversification.

The Mariposa Blog

In case you missed them, here are a few recent articles:

Using 529 Plans Effectively
Over the years, my clients and I have developed strategies to use 529 plans effectively when building a college fund. Here are three to get you started.

IPO Performance Overview
As with any investment strategy, my first reaction in evaluating IPOs is to look for data. And not just data on a handful of recent IPOs for scenario analysis, but data on all IPOs over decades of market history.

Valuing Real Estate (REITs)
In prior articles, I used the P/E ratio to value the stock market and to predict future returns. Let’s apply the same analysis to real estate, or more specifically REITs.

Managing Restricted Stock

When thinking about restricted stock units (RSUs) in a portfolio, most consider the tax and risk consequences of holding and selling restricted stock: should you elect to pay income tax when shares are granted rather than when they vest? How fast should you sell once they do vest? Should you use options to manage the risk of depreciation?

These are all important decisions, but they are already discussed at length elsewhere. Instead, let's discuss how RSUs can affect your strategy for the rest of your portfolio.

Let's say after careful consideration, you've decided on a 70% stock, 30% bond portfolio, but half of your savings is already in RSUs that you cannot sell. If you ignore your RSUs while managing your brokerage accounts, you essentially have two concurrent, but separate investment strategies. The risk profile of your overall portfolio is unfortunately largely dictated by your mix of RSUs vs brokerage accounts.

To manage both under one comprehensive strategy, I adjust RSU balances by its risk attributes, tax liability, and vesting schedule to integrate it with an asset allocation framework.

Risk Attributes
First, determine which asset class is most similar to your restricted stock. For most, the appropriate asset class would be US stocks. If you use more narrow asset classes, it could be something like US value stocks or US small cap stocks. The asset class you select here would be most affected by your RSU balance.

Next, estimate how risky your stock is relative to that asset class. Smaller, growth companies tend to be riskier than larger, dividend-paying companies. An easy way to estimate this for public companies is by looking up the beta of your stock on Yahoo or Google Finance.

Tax Liability
Unless you specifically elected otherise, income tax is due when shares vest. In this scenario, you can discount your unvested shares by your tax rate to estimate the after-tax value. For example, assuming a 40% total tax rate, your unvested (and untaxed) shares would count at 60%. If you did make the tax election, you should only discount for capital gains taxes.

Vesting Schedule
Similar to discounting future cashflows, you can discount shares by their vesting date. This accounts for the possibility that you are not with your current employer when shares are scheduled to vest. If we use a 25% discount rate for an example (you switch jobs every 4 years or so), shares due to vest in one year would count at 75%. Shares due to vest 2 years from now would count at roughly 56%, and so on. This procedure allows your shares to accrue smoothly to 100% as the vesting date approaches.

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Mariposa Capital Management, LLC

Thoughtful, evidence-based investing.

Mariposa Capital Management is a boutique investment firm designed for individuals who want a different way to invest. We use simple yet effective strategies that are based on research and empirical data. Our compensation is wholly earned through fees paid directly by our clients--gone are the days of commissions or hidden incentives. That way, we can focus on our main objective: you.

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