Tech workers whose salaries include stock awards may have seen their net worth increase this year thanks to the continued rise in tech stocks. But if they withdraw money too early, they may face undesirable tax consequences and lose future earnings.

The Nasdaq Composite index has gained over 20% this year, led by tech giants like Apple (AAPL), Alphabet (Google), Meta Platforms (META) and most importantly AI chip maker Nvidia (NVDA), is up 170% this year and has reportedly produced millionaires among its employees.

Investopedia He spoke with David Amann, a former tech employee and financial advisor who now works with stock-based compensation clients at Edwards Jones, to learn how employees can navigate market volatility, understand diversification, and what mistakes they can avoid when dealing with this situation. stock options.

Here is an edited excerpt from that conversation.

INVESTOPEDIA: Do you know people who are millionaires? stock compensation they have? What are some of the mistakes they make while making money so quickly?

Personally, before becoming a financial advisor, I worked for Netscape, which went public in 1995. I had a front row seat to see what can happen when you don’t follow some basic guidelines. diversification and making sure you fully understand your stock compensation.

When I was at Netscape, stock compensation felt kind of like a lottery ticket to me; I hadn’t considered this as part of my long-term strategy. I was sure I would retire on a Greek island somewhere.

INVESTOPEDIA: What were some of the tax mistakes you made?

I think it’s really important to work with a tax professional when dealing with share-based compensation, I would definitely want to do that.

Some types of stock compensation incentive stock options or a employer share purchase plan—If you hold onto these taxes for a certain period of time, they can provide you with tax benefits. like others restricted stock units (RSUs) or non-qualified stock options may not necessarily have the same advantages. It can get really complicated.

However, I don’t think people should let the tax tail wag its dog here. I’ve seen too many people focus solely on the tax benefits of stock compensation and forget other critical factors like diversification or how volatile the underlying stock may be.

INVESTOPEDIA: What advice do you give to your clients whose majority of their earnings are in stock options and the market is volatile?

When I think of employer stock compensation, it’s about using those assets to achieve some meaningful long-term financial goal, like your child’s education (saving) or paying property taxes.

When we consider whether to buy or sell stock options, we want to consider this (long-term) strategy first. Whether people should buy or sell will be determined by (one’s) goals (and) what they are trying to achieve.

INVESTOPEDIA: In general, how much of their portfolio should people allocate to their company’s shares?

You should always remember that you are not only investing in your own company shares, but also receiving your salary from that company.

At Edward Jones, we have a general rule that no one should have more than 5% of their investable net worth in a single investment. You may even want a lower amount than this when considering stock-based compensation. If your company is going through a tough time, not only will the value of your stock-based compensation decrease, but there will also be the potential for layoffs, which will impact your employment situation.