Are You Still Investing In Your Companys Stock

March 09, 2012

Are You Still Investing in Your Company’s Stock?
by Cathy Pareto, MBA, CFP®

For many investors investing in their company’s stock makes sense. After all, you are an insider and it makes you feel like you know what is going on in the company. If anything were to go wrong you would be the first to know right? Or, you may think that you are doing great and your division is doing great, so it is safe to assume that the company is doing great right? Or, you have had meetings with your Human Resources Department and Manager and they have assured you that your company is not like “those” other badly managed companies. These may be some of the thoughts that may go through your head as you pour more money into your company’s stock. But are these thoughts rational or are you getting blindsided?

As investors, we know or should know that we need to be as rational as we can be when it comes to investing. After all, investing is about taking measured risks and looking at the numbers. Unfortunately for many of us it is quite difficult, if not impossible, to remove emotions from our decision making. And when it comes to investing, our emotions can sometimes have a detrimental effect in our portfolios.

Why People Do It

Aside from the myths that were mentioned in the introduction (yes they are myths) there are many reasons why people invest and sometimes invest heavily in their company’s stock. For one, companies sometimes allow employees to purchase shares at a discount in the form of stock options or through discount stock purchase plans. Other times employees receive a match on their retirement contributions not with cash but with company stock. And sometimes, depending on your position you may be expected to invest in your company stock. It makes sense for the employer; they not only gain your loyalty but may also be able to reduce their payroll. And if you are working for a startup it is an easy way to get you to work hard for less because you hope to make it big later when the company goes public or it becomes a huge success.

The question is, does it make sense?

Why You Should Not Do It

There is a reason why financial planners and investment advisors recommend not putting your eggs in one basket. It is simply too risky. The more you invest in one stock, the more at risk your retirement account will be. You may be saying to yourself, “but my company is in fact a good investment”. That may be so, but think for a moment: if your company runs into trouble, not only could you lose your job but the value of your retirement account is bound to shrink if not disappear altogether. Is it worth the risk when you can easily diversify your portfolio? I do not think it is.

We all know what happened to Enron and to the 401Ks of their employees and if you don’t here it is: 57.73% of employees’ 401(k) assets were invested in Enron stock as it fell 98.8% in value during 2001. In one single day, they were locked out to sell any of their stock, they lost their job, and they ultimately lost most of their retirement money.

The latest victims of this are employees of Bear Stearns and Lehman Brothers, who saw their net worth erode if not disappear in a matter of days. Given the current economy, it is likely that we will see this scenario play out again.

According to a study done by the Employee Benefits Research Institute and the Investment Company Institute 33% of employees who have the opportunity to invest in their company’s stock do so, and as much as 9% of these employees have 80% or more of their 401(k) assets invested in their employer’s stock. Employees in their sixties had almost 20% of their 401(k) savings in their company’s stock and almost 12% have more than 90% in their employer’s stock. What is wrong with this picture?

It is bad enough to put your retirement at risk when you are young (presumably you can still make it up if it goes bust), but to do so in your sixties or so close to retirement is criminal and foolish.

How Much is Too Much

There is no one answer to this question. There are good ethical companies with competent management teams and healthy balance sheets, but even these can suffer from economic downturns, lawsuits, or miscalculations. My thoughts, you should step out of yourself and study your company just as if you were an outsider. If you determine that this is a good investment you should still diversify your account and probably not invest more than 2%-5% into your company. Lastly, if you own mutual funds you may already be investing in your company, so make sure you don’t invest more than you should.

It’s Your Retirement

Owning your company’s stock can make you feel good; after all you are a “part of the team”. But this feeling comes at a high risk. No one cares or should care more about your retirement than you (not even your current employer). Diversify your portfolio and do not feel guilty about it. No one has to know how much company stock you dumped, and I can assure you, you will sleep better at night.