This post is part of the Financial Rules of Thumb series. Check out the rest here!
(Today’s post comes from Trevor Acy, an Upperline Financial Planning intern)
Some companies offer great deals for employees to invest in their company stock. While it’s not exactly too good to be true, there are definitely risks you should be aware of.
The Upperline: Diversification is important. Having too much investment tied to the same place your income comes from can be risky.
It’s tempting, I know. They’ll give you a match or a discount to purchase company stock. There is nothing wrong with taking advantage of those options. We strongly recommend that you guard yourself against putting too many of your eggs in one basket.
Single stocks are riskier and even more so if it is your company’s stock.
Single stocks mean you are relying on the performance of one company to earn dividends and interest. If that same company pays you too, you run the risk of losing your investment and your job.
One day, you will no longer work for that company.
You are going to find another job or retire, they are going to downsize you, or you will die. You know your job is not going to provide an income for you and your family forever. You will have to rely on different sources of income at some point which should involve your investments.
If your company goes bankrupt and you’ve invested heavily in their stock you’ve just lost your income and your investments. That’s not a good one-two punch. Take the match or the discount, but don’t overload your investments in your own company’s stock.
Make sure you are spreading yourself wide enough that poor performance from any one investment doesn’t derail your financial goals.
How can you take advantage of employer stock benefits and remain diversified?
- Choose diverse options in your 401(k) plan. Your company likely offers 20+ investment choices on their retirement plan lineup. Choose low-cost, well managed options that cover the broader market and fixed income landscape.
- Diversify away from employer stock as soon as possible. Every plan I’ve looked at has different timing restrictions on how long you must hold the employer stock. Familiarize yourself with the rules of your plan and put a reminder in your calendar to move funds from your company stock to your diversified investment choices on a regular basis.
What questions do you have about your personal investments in employer stock?