My current employer doesn't have company stock as an option for our 401k (it's a privately held company), but I have worked at places where company stock was an option. At that point in my life, I didn't know any better, so I did what many people do -- put a majority of my 401k into the stock of my employer. Big mistake? Not in the end -- I turned out ok, not great. Risky? Yep.
Here's a piece from Money that highlights the fact that investors are wise to limit holdings of their company's stock in their 401ks. Let's start with how many people currently invest 401k money in company stock:
Company stock remains the single largest investment in 401(k) plans, accounting for 25% of assets in those that offer it as an option, according to consulting firm Hewitt Associates. And more than a fifth of plan participants have over half their balance invested in company shares.
So what's the problem? Why is it not a good idea to have so much tied up in company stock? Here are a couple big reasons:
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.
There's an even greater danger to investing heavily in your employer's shares: subpar performance. Generally, a single stock is twice as volatile as a diversified portfolio of stocks. Although all that bouncing around could lead to jackpot gains, more often than not it translates to a smaller account balance at retirement - and in some cases you could really get hammered.
Good points -- especially on the job-related one. While your 401k may be worth a lot, your job (and the earning potential it provides) is worth even more. Having two huge assets (your career and your 401k) tied to the success of one company is certainly risky.
So what does Money suggest as a percentage you should hold in company stock? About 10%:
So holding anything more than, say, 10 percent of your 401(k) in company stock is a lose-lose proposition: You're taking on more risk for what will likely be a lower return.
To me, there's not a firm guideline here. I think you need to look at your investment goals, your asset allocation plan, and then see how your 401k fits into your total portfolio. From there, you can decide what percentage goes to company stock and how the rest is allocated as well.
For more thoughts on investing and retirement planning, see these links:
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