Wednesday, April 2, 2008

How much Employee Stock is too much?

I work for a large corporation and through my 401(k) I have invested in the company stock. The company has also given me stock as a match to my contributions and I have been fortunate to receive stock options. All of this means, I have a lot of shares in "big mama" corporation.

In fact, my company stock as a percentage of my total portfolio continues to increase steadily. Over the last 6 months, it has grown to 15% of my total holdings. The growth is not so much from the stock appreciating as it is from my other assets shrinking in value!

According to most financial advisors 15% is way too much invested in a single stock, and way too much invested in my own employer. Most financial planners advise that no more than 5% or your retirement portfolio be concentrated in your company stock.

Gee, my company stock has actually been one of the few bright spots in this market. It has held it’s own throughout this credit crunch ordeal, while nearly all other assets have plunged 10 to 20%.

From the beginning I have always rationalized that my employer’s stock is different, it’s a defensive stock, somewhat of a hedge against the market. To this day, that reasoning seems to have been right on target.

However, I have this eerie feeling and can’t help but wonder if Bear Stearn’s employees made similar assumptions. Thinking that Bear was just too big and too important to the US economy to ever fail. Of course, Bear wasn’t allowed to fail, but with the revised rescue plan, the value of the company stock owned by Bear employees is now worth a tenth of what it was just three months ago.

Can you imagine that? Your 401(k) dropping in value from say $200,000 to $20,000 in less than 90 days? Whether you are young or about to retire that has got to sting. Have we not yet learned our lesson from Enron and others about the pitfalls of owning too many company shares?

This NY Times article provides some interesting stats about company stock plans.

In 2001, when Enron filed for bankruptcy, investors in 401(k) plans that offered company stock held 28 percent of their retirement account in employer shares, on average, according to Hewitt Associates, the employee benefit research firm. By the end of last year, that figure had dropped to 16 percent.

That’s a big step in the right direction, but it’s interesting that the article also points out that some 401(k) participants are still making huge bets on company stock.

At the end of last year, nearly two of every five 401(k) participants were putting 20 percent or more of their money into employer stock, according to Hewitt. And about one-sixth of participants were investing half or more of their nest eggs in it.

It seems that familiarity with one’s company stock is a big factor. It’s probably comforting to many employees to buy stock in what they know best – their own employer. Isn't that what the luminaries of investing such as Peter Lynch and Warren Buffet have been telling us all along - invest in what you know?

I am willing to risk a little more than 5% in my company stock and a little less than 15%. My goal is to get the allocation back around 10% and maintain that for the long run.

For more personal finance information check out the Money Hacks Carnival #6. My article, "The Real Cost of Outsourcing Tasks" was included.


  1. asset protection is often the enemy of exceptional asset appreciation. my first major employer stock appreciated 10x before i sold. my second major employer stock appreciated 10x, too. pure accident, really. accidents happen in both directions. so no, you're not being prudent, but you still might prosper.

  2. That's right. Fortunately, I am at the point in my financial life where I do not need to take on as much risk. I can arrange my portfolio to provide a more steady performance, albeit a more boring one!

  3. I would agree that 10% is a safe reasonable percentage to have in your own company as long as you use the due diligence that goes with single stock ownership.

    Bear Stearns is a terrible case in that their stock was over $170 in Jan '07. That's a long way to $2 and I'm sure many employees had a big percentage in their 401K's since they owned 30% of the stock. I feel for those employees who have lost everything.

  4. @Soulfire: your comment reminded me that so many people have all of their "nest egg" in their 401(k)s. It's a financial misstep, but very few of my colleagues have any outside investments in taxable accounts.

  5. Kristin: I have recently came to the conclusion my percentage was way out of line. As an insider, my window to sell is very limited. I once went 2 years with a no-sell restriction due to a deal we were working on. At any rate, I am currently at 40% and working my way down.

    If you are interested, I blogged about it here as "My Dirty Little Secret".

    Best Wishes,

  6. D4L: That's an interesting problem. New legislation has given employees more leeway to offload company stock, but evidently insiders still have a lot of restrictions.