How Much to Invest in Your Company's Stock

I've written before about the need to limit the amount of your own company's stock you have in your 401k, so consider this post part of a regular reminder. There are really two major concerns associated with buying too much stock of a company you work for. The first is simple diversification. You don't want ANY stock to be a large, dominant part of your investment portfolio. The second is that you already have a lot of financial interests tied up in the company (your job) -- how much more do you really need/want? As I said in the last post on this subject:

Buying your employer's stock, after all, amounts to placing two big economic bets on one company. If your firm suffers an Enron-type collapse - or even a less dramatic downturn - you could lose your job and a big portion of your retirement savings.

This article from USA Today gives advice on how much to invest in your company's stock and starts by reinforcing this latter point:

But you've already got plenty invested in your company, even if you don't own a single share. Your day-to-day financial security depends on your company paycheck. If you have a pension, then part of your retirement is already tied up in your company. "You have so much on the line just by working at the place," says Chuck Carlson, CEO of Horizon Investment Services, a Hammond, Ind., investment company.

Then, USA Today offers some solid thoughts on how much you should invest in company stock:

All of which brings us to the first rule of investing in your company stock: Don't invest more than 10% of your 401(k) assets in it. Most mutual fund managers won't put more than 5% of their assets in one stock. A 10% position is a huge bet.

If you read the piece, they say don't invest 10% unless you've got a really, really, really great reason to do so.  5% is good enough.

What would constitute a  really, really, really great reason? They offer a couple ideas:

• You should pay attention when an insider digs into his or her own wallet to buy shares. After all, insiders already receive gobs of stock, either by exercising options or outright grants. To buy additional shares on the open market, they need to be powerfully convinced of the stock's prospects.

• As an employee, you may have a good handle on how the company is doing, what its growth prospects are and whether Wall Street is treating the stock fairly. You may, for example, be faster than an analyst at a brokerage house to recognize when products are flying off the shelves. But you have to temper your own insights with some emotional control — and some research. Start with the emotional side. "You could have a great boss, but that doesn't make the stock a great investment," says Ray Ferrara, a financial planner in Clearwater, Fla.

My company is privately held, so I don't really have to deal with this concern -- but I have had in my lifetime. My second employer made its 401k match in company stock and also offered a discounted stock purchase plan (which I took advantage of). In addition, I was awarded shares of the company on a regular basis. I must admit, I was over-weighted in their stock for a few years (that was back in my pre-personal finance days). They did fine during that time though, and I cashed out when I moved on.

Comments

[Dave]

The answer is 0, this coming from a former Nortel and Sprint employee.

[J Martin]

I think this is good advice. A lot of people really don't think about their retirement. Even after the Enron collapse, I have several co-workers that have all their 401(k) in our company's stock. It would serve them well to read this.

As for me, I have to agree with Dave. With my paycheck and pension being locked into this company, I decided to go in a completely different direction with my 401(k).