Stories are emerging of Bear Stearns employees with significant losses in their company stock-based retirement holdings. Examples: a nine-year employee has reported losing $600,000 and a seven-year veteran lost $400,000. Similar stories are likely to emerge in months to come. And though subsequent reports may not feature staggering amounts like these, there are sure to be many with losses that are devastating to their personal finances. This situation underscores a basic guideline of investing: don’t put more than 10% to 20% of your portfolio value into your company’s stock. Why?
Because you need to diversify and you already have your most valuable financial asset invested with the company — your job. The Street outlines why this guideline makes sense:
People must realize that company loyalty should be demonstrated in ways other than having a large portion of their net wealth invested in their employer’s stock. ‘If the company goes under, they’re already going to lose their source of income; they needn’t lose their life savings as well,’ says Tim Maurer, director of Financial Planning at the Financial Consulate in Baltimore, Md. ‘Diversifying away from too much concentrated publicly traded stock exposure is not disloyal; in most cases it’s just smart.’ The very best way to prevent crumbling with your company is not to have too much invested in it.
We think an even better option is not invest at all in your company’s stock. Instead, focus on helping the company by doing a great job and manage your investments completely separately. And for those who think you may have some sort of special insight into why your company is such a great investment, ask yourself if Bear Stearns employees foresaw the quick collapse of their company. Sometimes those closest to the tracks are the last ones to see the train coming.
Loading Up on Your Company’s Stock Is a Bad Move [The Street]
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There is a HUGE difference between stock compensation and any stock he had in his 401k. Bankers get paid a large portion of their salary in the form of restricted stock….period. They can’t take it in any other form. Any assets in his 401k he is free to move around at will which I’m sure he did. Citi might have a matching program where they might have given him stock for his 401k but we are talking small amounts (remember you can only contribute 15.5k to your 401k each year). I wouldn’t feel too sorry for the guy. I’m sure he has enough to get by on, but it still hurts to see 1/3 of your wealth evaporate overnight.
It seems that people here are only investing in 401k accounts.
Are others investing non-retirement funds?
I have my 401k in non-company stocks but I found it fairly easy due to a paycheck buying program to buy company stock.
I drop $20 a paycheck and pick up a share each week. I’ve since moved on to online stock programs and invest what I can there in addition to my 401k.
But the low barrier to entry, no fees and dividend reinvestment made this a great way to start. I wound up with 2k in stocks without much effort.
Is it common to only invest for retirement? My parents were pretty poor with money and I have no clue what’s normal.
@Techguy1138: Nope…I’d say you’re being pretty smart about it as long as you’re putting enough into your retirement funds to meet your goals there.
For me, saving is all about priority management:
1) Savings for retirement. At the very least, you should be getting the full company match. Check out some of those online calculators to figure out how much needs to be going into the 401k/IRA to meet your retirement goals.
2) Savings for an emergency. If you lose your job you ought to have enough to survive for a couple of months without having to run up the credit cards. Basically, set aside enough to pay the rent/mortgage, utilities, health expenses, transportation expenses (remember these go down though), and food. Remember, in an emergency you’ll be able to cut back on a lot of more frivolous stuff like eating out, movies, cable TV, etc.
Company stock is not a good choice for this kind of savings because there are often restrictions on when you can cash it in. Just figure out how much you need and stash it away in a savings account where you won’t be tempted to take it out. I keep mine in a separate bank with no ATM card just for that reason.
After this is fully funded, you can pretty much ignore it until you need it, although you should reassess your expenses every so often, especially if your life status changes (e.g. you buy a house, get married, have a kid, etc.)
3) Savings for a house. Obviously this doesn’t apply if you’re already paying a mortgage, but if you’re renting, you should be putting money here. Owning your home is still a great investment, especially if you plan on staying put for a while.
Your company’s stock purchase plan might fall into this category, but don’t put all your eggs in one basket here either. My company stock is in this category, but I put a lot more of this money into CDs rather than stocks because I plan on using it relatively soon. Be careful about how long you are required to hold company stock with this one.
4) Savings for mad money, expensive toys, gift giving, etc. A savings account is probably fine for this, although your company stock might fall into this category too.
Michael Belisle: WOW. Nice post. Kinda sad, though.
Usually that’s the case. But I checked my 401(k) the other day, all of the funds are losing money except for my company stock.
@aquanetta: Everyone’s losing money (except the short players) and here’s the dirty little secret: despite all the advise above telling you how stupid you are, you’re probably a smarter investor than they are. Congratulations.