If you work for a large corporation, chances are they offer some way to obtain company stock. A lot of companies use stock (ownership in the company) as a compensation incentive and as a retention tool for key employees.
various Ways to obtain employer stock
There are numerous ways that your employer can make their stock accessible to you. Here are the most common ways that I see:
- Stock Options (ISOs and NSOs)
- Restricted Stock
- Restricted Stock Units (RSUs)
- Stock Appreciation Rights (SARs)
- Phantom Stock
- Employee Stock Purchase Plans
- Employee Stock Ownership Plans
- As one of the investment option of your defined contribution plan
Talk about complex!
No matter which way they present it though, the end result is usually the same. You take them up on their offer and you accumulate more and more company stock as time goes on.
And, why not? You’ve been there for years, you love what you do, and you can’t imagine the company ever going out of business.
the Rewards
Do you want to know a potential way of getting rich? Putting a sizable percentage of your portfolio in one asset that appreciates in value.
Imagine working for Google or Facebook over the past several years and acquiring company stock along the way. You could have accumulated quite a bit of money by taking part in one of their employee stock purchase plans.
It’s rare circumstances like these that having the majority of your portfolio
The risks
Do you want to know a potential way to lose all your money? Putting a sizable percentage of your portfolio in one asset that depreciates in value.
Take General Electric (GE) for example. GE is one of the most recognizable companies in the world. I bet the employees of General Electric never thought twice about owning its stock.
But it’s share price has fallen nearly 80% since March of 2016. This kind of price decline would be absolutely devastating to an employee with a majority of their retirement savings in the company stock.
double the risk, double the pain
No matter what your view on the financial stability of your employer is, the simple fact is that employer stock is one of the riskiest investments you can own.
By simply by working for your employer, you already have a large portion of your personal financial success tied to your employer’s success.
Your job provides you income, which enables you to save for the future in the first place. Your financial wellbeing is already dependent on your employer, adding company stock into the mix only doubles your risk. If your employer goes out of business, you lose your job and your retirement security.
How Much is too much?
Okay. You’re probably at the point where you want to sell all of your company stock. But that’s not the message I want to convey.
It’s true that I think the risk of having too much employer stock in your portfolio outweighs the potential rewards but a small portion can be part of a generally diversified portfolio.
A general rule of thumb to follow is to have no more than 5% of your investment portfolio in any single stock (not just your employer’s).
Of course, the thing about rules of thumb is that not everyone’s thumb is the same.
In order to determine if you have too much company stock in your portfolio, consider these four things:
- What is your appetite for risk? If you are the gambling type and can stomach the thought of your investment losing value if it means hitting the big one, then a higher allocation to a single stock might make sense for you.
- Do you have the ability to take the risk? If the stock drops in value by even 40%, will it totally disrupt your ability to retire? If you have sizable, diversified, retirement savings outside of your employer stock you can probably take on more risk than if you didn’t.
- How many years until you retire? If you are 20 to 30 years away from retirement, you have the time to make up for loses and can be a little more concentrated. If you are within 20 years of retirement, you’ll probably want to scale back.
- Does the stock fit into your overall financial plan? Will the stock help you achieve the rate of return you need to reach your retirement goal? There might be a specific purpose for the employer stock and it’s okay to be a little more concentrated.
At the end of the day, it takes having a well thought out financial plan to determine how you handle your concentrated stock positions, so make sure you have one!