When saving and investing for your retirement, it is important to maintain a balanced and well diversified portfolio. A common (but easily avoidable) mistake is concentrating too much of your nest egg in one investment. This can be especially risky if the concentration is in your company’s stock.
Despite the risks, it is quite normal for employees to invest a sizable portion of the 401k accounts in their company’s stock. According to the Plan Sponsor Council of America,when company stock is offered as an option, the average allocation to company stock in employee retirement accounts is 18%. Further, more than 2% of workers have more than half of their nest egg invested in their company stock.
There are several reasons why an employee might have a large allocation to their company stock. Many businesses allow their employees to purchase company stock through employee stock purchase plans. Employees often receive some or all of their bonuses in the form of company stock or options. And some employees buy company stock simply out of a sense of loyalty or familiarity; they feel comfortable buying what they know.
There is a two-fold risk with owning too much of the stock of your employer. First, negative stock performance is often due to problems with the business and second, this can also mean your job is in jeopardy. Losing your income and a significant portion of your retirement account could create a “double whammy” to your financial security.
For an example, in a recent article, Wall Street Journal columnist Jason Zweig cites recent SEC filings that disclosed over $1 Billion in losses for workers at companies whose stock fell by 50% or more in 2015. The article goes on to focus on locally-based Kinder Morgan, whose workers lost 48% on their holding in KMI stock, while the S&P 500 gained 9% over that same period.
We typically recommend that our clients limit their exposure to company stock (or any concentrated holding) to no more than 10% of their portfolio. We suggest that they review their position often and diversify when they can. We also counsel them to view their retirement portfolios in the context of all of their investments and to maintain an overall allocation that is appropriate for their unique goals and financial circumstances.
If you would like to review your retirement plans and account allocations in greater detail, we would be happy to schedule a meeting or a conference call at your convenience.
Horizon Advisors is a Houston based fee-only wealth management firm. Horizon specializes in helping successful individuals and families understand, organize, and manage their often complex financial situations. Horizon offers integrated financial planning and investment management services.