Friday, October 19, 2007

Company Stock: Don't Put All Your Eggs in this Basket

I recently attended a workshop that our company sponsors from time to time on different retirement topics. I'm not even 30 yet, so I was definitely the youngest in the room. It didn't bother me, because I know that I learned things to help my future retirement pot grow to its greatest potential. In any case, the topic this time was asset allocation. It's a pretty familiar topic to me as it's key in providing a risk-tolerant and consistent return over the long haul. However, I was able to pick up a few nuggets of knowledge to use in the future.

The thing that caught me off guard was the stat shared about the number of people in our 401K plan who invested in company stock (~40%) of which a large percentage had NOTHING else invested except company stock. I was surpised they didn't go into specifics as to why it was not a good idea. It may not have mattered since I'm guessing those who needed to hear the advice were probably not present anyway, as these sessions are voluntary. If your current cash flow (salary) is controlled by Company A, why would you rely on Company A to provide your retirement income (401K) as well? In my opinion, it's just too much of a reliance on a single entity. I hate the fact that people's lives were in financial ruin because of it, but the Enron example is a strong and real one that hopefully others can learn from.

I can understand the reasons for investing in your company's stock, however, there are alternatives for each:
· Wanting to be an owner in your company - Keep a maximum of 5% of your portfolio invested in the stock and you can still have ownership while properly allocating elsewhere.
· Sense of pride in your company - Buy their products/services instead, tell others why they are a good company.
· Don't know what else to invest in - Choose a retirement date/target fund or low expense index fund(s) instead.

In a former employer's plan, we were given a 4% match in the form of company stock. It wasn't ideal for me, but I wasn't going to complain about an equivalent of free money. Luckily, about 4 years after I started working there, we were given the option of transferring the stock into other funds as well as newly matched investments. It went into effect on 1/1 and because I noticed our stock in the past had been fairly cyclical, I waited a few weeks until I felt the price was right (I know, trying to time the market is dumb) and I moved ALL of it into the other funds I had chosen. I was probably in the minority that took similar action or even noticed the change had occurred. We didn't receive mailings, emails, etc...I only noticed due to a small intranet announcement.

I don't like to get involved in other's financial business without them asking for advice, but this is one area where it's probably worth it to make suggestions if they talk about owning company stock for one of the above reasons.

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