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March 25, 2010


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I had 10% of my 401k in Worldcom (my employer at the time) and didn't bail out in time. When the decline started that amounted to about $18k. Several of us did the old "Slim Pickens riding the bomb down" routine and we ended up losing much of it. I did end up getting about $600 back from the settlement of the stockholder's class action suit that was the result of their accounting misdeeds. I don't think that I will make that mistake again!

When you work for a company you already depend on that company's health. If the company goes bust you lose your job; it is best to not lose your savings too. No one should have more than 0% of their investments in their company's stock unless they have no choice. If the company matches 401k contributions in stock then that stock should be sold and reinvested as soon as it vests.

Enron is a good obvious example. Many employees had large investments in this company while also working for them.

On the diversification subject, I also think it is a good idea to have some funds in a taxable retirement account and some in a Roth. We really don't know whether our taxes will be higher or lower when we retire than what they are today.

I suspect the real answer is 0%, but no-one wants to admit it!

Your upside potential is no better than picking some other company's stock. (It is highly unlikely that you work for the best performer on the stock exchange in any given year.) Your downside is much higher - they go bankrupt and you are unemployed with a worthless stock. Even if they don't go bust, what happens if your industry hits hard times, the company downsizes (you get laid off) and the stock drops just when you need the money?

By the way, I am a hypocrite - almost 25% of my total net worth is in company stock and another 10% in industry peers. Emotion is much stronger than Rational Analysis.

Just getting started in the investment game, but I do own some of my company's stock. We have our emergency account funded to 6 months worth of expenses (could probably stretch to 9) and no debts other than student loans and mortgage (all low rates).

The company pulls out a percentage of post-tax income and we get stock at a fairly good discount below market price. No restrictions on holding period. The tax rate (on gains and discount) is treated as normal income if you sell within a certain period (2 years, I think) but treated as capital gains if held for longer.

So I would agree for the most part, but in my case I can turn an instant profit with no risk if I sell the shares right when I get them. There's really no risk except for what I'm currently holding, but even then it is a calculated risk that my wife and I have gone over, and we can tolerate the entire loss and still be fine.

I think the Enron comparison is used too loosely. Of the millions of companys out there, I do not think they all operate like Enron. My company, (100 years old), has made improvements because of Eron. Most of my assets are in company stock. Only because of company matches, profit sharing and out perfroming the market for the last 10 years. A good problem to have. Never say never, but I feel they will hang on for another 5-10 years when I retire. A good rule not to have all eggs in one basket, but not because of Enron.

I work for a privately owned company and my husband is a teacher. We own 0% of company stocks. We do own quite a bit of Johnson & Johnson though...I don't think it's 10% yet, but I will check when I get home.

Enron may be an extreme example, but consider the oil industry. It is cyclical, and companies routinely lay off 20% of their workforce and then rehire (usually other, cheaper people) a year or two later.

Their stocks are equally cyclical - the bottoms coincide very nicely with the layoffs. Quite unfortunate if you need the money because you just got laid off.

These companies are 100 years old, and they are operated very well - part of which includes riding the cycles. Unfortunately, "operated very well" includes layoffs when business is slow, which is also when the stocks are down.

BTW - Isn't (the old) General Motors 100 years old too?

Fortunately, the company stock I owe is not in my retirement savings. Actually, I make it a point to put 0% of my 401(k) in company stock. Specifically, I owe company stock through ESPP. That comes from "side" money, not savings. And that's all of the risk I want to take with our stock.

^^^ own, not owe...

@Anthony: You are exposed to the risk that your unplanned departure will conicide with a drop in stock price. Maybe worse than having it in your retirement fund?

In my opinion, when you work for a company AND put a large percentage of your savings in that company's stock, you are concentrating way too much risk in that company.

It always amazes me when I hear people rationalize it by saying that "I know the company, it's what I'm comfortable with." Not good!

Some compensation arrangements make it inevitable that a percentage of your earnings will come in the way of company stock (example - 401k match), options, etc - which are valued in concert with the company's performance. If the you lose your job and the company performs poorly (or vice-versa), you're going to lose a lot.

I think its good to limit investments not only in your own company, but also in the industry in which you work. For example, if you work for an energy company, you probably don't want to be allocating a high percentage of your investment portfolio to energy stocks, either directly or in funds that invest heavily in that sector.

There's nothing wrong with owning stock in a good company, even if it's one you work for. But...

(1) if the company hits hard times and you get laid off, the stock value will probably be way down. It definitely shouldn't be considered part of your "emergency fund". It can still be a part of your retirement fund, but...

(2) if the amount of stock you own in ANY company or industry is too high in relation to your overall portfolio, you risk losing a lot if that company or industry hits a big downturn. Make sure your asset allocation is good -- have the right level of exposure to both stocks and bonds, and make sure your stock exposure is broad enough. Remember that your employment is a form of exposure, and evaluate the risk accordingly.

(3) if your company gives out stock as performance bonuses, it may be worthwhile to hold on to it for a while simply for tax purposes (cap gains vs income.) If the amount of stock your company gives you as a bonus is large enough to significantly affect your portfolio balance, either you need to work on growing your portfolio, or you just got a fantastic bonus and you need more specific advice.

@Mark: No, I don't believe I run that risk. We buy every 6 months through payroll deductions. If I got laid off, fired, accepted a different job, etc. then I would get my payroll deductions back (albeit without any interest that could have been earned elsewhere). And if I end up buying stock, it's mine until I decide to sell it. I don't lose the stock if I am terminated.

There is still risk that it won't earn any money. But it's not a double doozy.

@Anthony: You don't lose the stock but if the company is in a rough patch and needs to pay you off, the stock will probably be at a low. If it's a temporary setback and the stock comes back before you need the money - no problem. But I have seen a LOT of people needing to tap stock bought through a stock purchase plan.

I was given a stock option after working for a co for 7 yrs.. I accepted and the money grew... A lot! I was laid off after 9 yrs. I thought my account closed since I didn't quit. I received a review of balance only up to the year I was laid off. No letter from the co or other info.. Are these accounts still open and building interest? Can I sell or liquidate? Please HELP!

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