If you work at Tesla, Google, Disney, or another big publicly-traded company, you’ve likely considered owning their stock. After all, they’re successful, growing companies, right? Whether you’re given stock or stock options as part of your compensation or have the opportunity to buy company stock, it’s important to understand the potential risks.
Too Much of a Good Thing
We’ve all heard the phrase “too much of a good thing.” Like sweet desserts, investing in your company can sometimes become too much a good thing. Consider this: as an employee you are already investing in your company. You believe in its success and security, which is why you work there. You might also contribute to your company 401(k) plan, which is another investment in your company. But if most of the stock you own is in the company, you could be putting all your eggs in one basket. If the company went under or suffered a major setback, you could lose your income, your benefits, and your portfolio could take a major dip.
Unfortunately, this situation happens often. Employees and business owners who own company stock often have a hard time selling. Even during times like now when those stock prices are hitting all-time highs, they still struggle selling them and diversifying their portfolio.
According to a study by the Employee Benefit Research Institute, 53% of employees who have the option of buying their company’s stock elect to do so, 40% allocate 16 to 19% share of their portfolio to company stock, and 7% have more than 80% of their assets invested in employer shares. That’s taking a big risk if your employer’s stock takes a tumble in the markets.
The Golden Combination
When it comes to investing, there are a few golden rules I recommend my clients follow: sell high and diversify. Hanging onto company stock is doing the opposite of this. This doesn’t mean you can’t or shouldn’t own company stock. It can be beneficial for some investors if they can buy the stock at a discount and then sell at a higher price.
Ultimately, aim to allocate a maximum 10-15% share of your portfolio to company stock. This generally serves as good practice for any stock. Rebalancing is also a key factor in keeping your portfolio safe. It’s not enough to create proper diversification and just walk away. You need to regularly analyze your portfolio to ensure that it lines up with your risk level and that you haven’t become too reliant on any one asset category.
A Couple of Caveats
With investing comes important rules, and the same goes for company stock. Before buying company stock, review the fine print. Some have vesting rules or holding periods. You may be required to hold the stock for a certain time frame before you can sell. This can be risky, as the stock could potentially rise or plummet.
Secondly, if you work in upper management or the finance department, you might want to first speak with the HR or legal department. If you have any non-public information, you may violate insider trading laws when you sell.
Should You Buy or Sell Your Company Stock?
There are pros and cons to owning stock in your company, and there’s no one right answer for everyone. While you can reap the benefits of buying company stock, it’s important to research the investment lineup available to you and their associated costs.
Working with a professional, you can also evaluate your portfolio’s current lineup and whether it needs to be rebalanced or diversified. Consider mixing up your stocks with global exposure and alternative investments. Look at the big picture of all your accounts, including employer-sponsored ones, and ensure you are diversified across the board.
You don't have to be an expert at investing, you just have to know who to ask. If you have questions on your portfolio lineup and company stock options, get unbiased answers from a team you can trust. At Haydel, Biel & Associates, we’re committed to blending proven investment methodologies with creative financial technologies that make it easier than ever to accomplish your goals. For a complimentary portfolio review, contact me at (626) 529-8347 or email me directly at [email protected].
Ricky Biel, CRPC® is a wealth manager with Haydel, Biel & Associates, an independent financial advisory firm serving individuals and families near Pasadena, California. The firm was founded in 2004 by Chris Haydel and Ricky Biel with a desire to provide unbiased, client-centered, community-based financial advice. Together, they have built a practice that has grown into a family of caring, smart professionals committed to blending proven investment methodologies with creative financial technologies that make it easier than ever to accomplish your goals. They strive to keep things simple and fun to give their clients peace of mind and alleviate financial stress. HBA Wealth takes care of their clients’ needs first and foremost and goes the extra mile to make their clients’ finances grow. To meet and see how the HBA Wealth team may be able to help, contact them today at (626) 529-8347 or email Ricky directly at [email protected].