Why You Shouldn't Invest in Your Company's Stock

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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  1. Parting says:

    Ouch, this is why I pull my stocks every two years and re-invest elsewhere.

    Diversify is always the best option for better retirement.

  2. dragonpup says:

    This is why only 5% of my 401k is company stock. :p

  3. trademarked67 says:

    Seems like I remember something like this 6 or 7 years ago with another company that ended in financial ruin…ENRON

    Do people not learn?

  4. SOhp101 says:

    Don’t put all your eggs in one basket…

  5. Rando says:

    No, you should invest in your company, but never anything more than 5%…..lol

  6. Buran says:

    @trademarked67: I was literally typing the same thing when I saw your post, so I’m replying to it instead. No, people apparently don’t think it’ll happen to them. Just like the “I’m invincible” attitude of too many teenagers.

  7. mynameisnate says:

    If your co. is public and has an ESPP plan, just run with that and sell right after the offering period; that is unless you are up there and have a holding period. For most plans, that gives you a 15% gain automatically. And you are already holding shares for the next period.

    But I disagree with the post, when you work in a public company and you play an active role, you have some heads-up on your companies performance based on the overall office environment, as well as wall street’s expectations. I’m not talking about insider trading, but there is obvious money to be made.

  8. humphrmi says:

    Saying “We think an even better option is not invest at all in your company’s stock” is just as extreme as saying “invest your whole retirement in your company’s stock.” What is so wrong with a balanced portfolio? So if your company is under-valued you still shouldn’t invest in it? In most cases you can sell holdings too. Just like any other stock, your company investment should have a “buy” price when it’s cheap, and a target “sell” price. Don’t listen to dogma. Buy low, sell high, retire comfortably.

  9. MommaJ says:

    “What is so wrong with a balanced portfolio? So if your company is under-valued you still shouldn’t invest in it?” Well, what are the odds that the company you happen to work for is the also the best possible investment you could make to balance your portfolio? Virtually nil. And what are the odds that you’ve been so exposed to in-house hype that you are not in a position to dispassionately evaluate your company’s stock? High. If your company goes under, you lose your job and your investment. It’s just a foolish and, with the myriad other investment opportunities in the world, unnecessary choice. I convinced one of my employers NOT to include a company stock fund in their 401(k) plan because it was just a terrible idea for any employee.

  10. simonkapo says:

    In some situations, investing in your own company is great idea that you shouldn’t pass up, such as when you have an employer stock matching company.

    Some public companies (and probably Bear Stearns, although this Consumerist article and the cited “Street” article don’t say one way or the other) have investment programs where for each share of company stock the employee purchases, the employer will buy a share and put it in the purchasing employee’s name.

    Ex: Company X has a matching program. Their stock is sold for $20 per share on the NYSE.

    Employee A spends $4o to buy 2 shares of stock. Company X will then give Employee A 2 shares of stock as part of the matching program. Employee A now spent $40 to obtain $80 worth of stock (4 shares).

    Usually in matching programs the employees are prohibited from selling the stock for a certain amount of time.

    Basically, my point is that purchasing company stock isn’t a cut and dry issue. Factors such as a matching program must be taken into consideration, and both The Street and The Consumerist failed to mention them in their respective articles.

  11. yetiwisdom says:

    @humphrmi: Totally agree. It’s easy to say it in context of bear Stearns but what about all the other companies that don’t go under in a blaze of glory? I for one have reaped great rewards from investing in my ESPP though I certainly don’t have 20% of my portfolio in it. Ignoring the discount (@mynameisnate claims 15% which is consistent with other plans I’ve seen) is ignoring a great opportunity. The Street is right – don’t put all of your eggs in one basket, but the Consumerist is wrong to advise people not to take advantage of ESPP plans offering a discount. As with any investment, there is risk and mileage may vary but starting off @ 15% ahead is nothing to sneeze at.

  12. Coelacanth says:

    Our company’s 401(k) doesn’t even allow us to purchase shares in our own stock. Instead, they’re all mutual funds. I wouldn’t mind owning a *little* stock in order to boost company loyalty and feel personally invested.

  13. Stormcrow9 says:

    The best reason I’ve heard for not investing a major portion of your savings in your company stock is that it significantly increases your exposure to the companies misadventures. If the company becomes distressed or tanks completely, not only might your 401K become worthless but you also have an increased risk of losing your job. You have the potential to be unemployed with no nest egg to fall back on should that condition persist for an extended period.

    People should look closely at their personal risks (e.g. what industry they’re in, their ability to handle being unemployed) and invest to hedge those risks. I wouldn’t want to discourage anyone from taking advantage of a company match program, but many former Enron employees might wish that had purchased just enough stock to get the company match and put the rest in an index fund.

  14. Parting says:

    @simonkapo: However, you can pull out money and buy other stocks with the ”profit”.

  15. Hawk07 says:

    So, I don’t understand how all these IBs who think they’re hot s*** and going to make millions as a hedge fund manager once they do their time can be so dumb and leave half a million or more in a single investment.

    I know people who have gone into that industry and you could not pay me enough to do it. Well, maybe if we’re guaranteed $500,000 plus bonus, but $100-$300 is insulting to the hours they put in.

  16. alhypo says:

    Matching programs are certainly worth considering, but remember that a large part of the Enron disaster was the result of the attractive incentives they offered for employees to invest in the company. As it turned out, the incentives actually were too good to be true. They also had crappy rules like very short windows which were the only times lower-level employees could sell their investment in the company.

    So carefully read the terms of the incentives your company offers and consider the risks. If it seems like a crappy deal or if it seems too good to be true, I would probably stay away.

  17. ludwigk says:

    Employee stock purchase plans are generally good if you are at a big, stable company. Otherwise, you are gambling considerably. Investing your 401k in company stock again seems a little excessive, since it should be as diverse and “long term growthy” as possible.

  18. @ludwigk: A “big stable company”? What does that even look like anymore? Enron? Countrywide? Even blue chips like Ford are selling off pieces of itself to India…

    All I know is the stock market collapses when too many people pull out too much money all at the same time…

  19. @trademarked67: Do people not learn?

    Apparently not. Even yearly reminders haven’t done the job:

    2008: Why You Shouldn’t Invest in Your Company’s Stock, The Consumerist
    2007: What Enron Taught Us About Retirement Plans, Investopedia
    2006: Enron woes reverberate through lives, USA Today
    2005: The Perils of Your Company’s Stock, New York Times
    2004: The Case Of The Vanishing 401(k)s, BusinessWeek
    2003: The Post-Enron 401(k), Forbes
    2002: Odds workers will get Enron payoff: ‘slim’, USA Today
    2001: The Danger in a One-Basket Nest Egg Prompts a Call to Limit Stock, New York Times

  20. lukobe says:

    Bear Stearns employees especially should have known better, being in the financial industry. I don’t feel sorry for them.

  21. g4lt says:

    Honestly, the only reason I invest in my employer’s stock at all is that they match only in stock. I put my money in the funds an watch the match go into stock that I can’t bail out of until I’m 65, meaning that I’m putting my financial future in not the hands of the idiots I work with today, but the idiots they train. apologies to anyone offended by that reference, I know, what did idiots ever do to me?

  22. chiieddy says:

    The past 8 years, I’ve worked at private companies, BUT about 8 years ago, I spent 3 years at a major, public software/hardware firm. I put a small amount of my 401k into their stock, which was purchased at a major discount in the middle of the dot com boom. I also put a small percentage of my salary into shares, which I still hold. I think it’s all of 37 or so shares. If they tank, I’m not going to be out my retirement savings. I’m just waiting for the next major up cycle before selling them (10 years from now?). I was able to buy them at a 15% discount as well. At least I make about $13/quarter in dividends.

  23. Kloud says:

    @chouchou: That doesn’t even make sense, you’re either going to end up screwing yourself by reinvesting before a split/major gain, or by reinvesting INTO a stock that train wrecks like Bear Sterns.

  24. Snarkysnake says:

    If there is anything that we have learned over the last 20 years or so,it’s that loyalty to your company is NOT a 2 way street.If your company wants loyalty,it should hire a battalion of cocker spaniels. Hard to feel any sympathy for BS employees here. They lived by the corporate code of dog eat dog and they died by it.Now they know what it feels like to have a life shot to hell because of some financila chicanery…

  25. doctor_cos wants you to remain calm says:

    @Snarkysnake: You’re right, loyalty is NOT a 2 way street. But you’re backwards. The employers and managers who are pulling down the big bonuses are quick to walk all over the employees who are actually doing the work. But, hey, we get stock, right? And job security…what, no? Alrighty then.

  26. alexanderpink says:

    This is not good advice. Sure you shouldn’t put all your money in any one area, including your company, but it would be stupid not to invest in you company if it is financially sound. You are knowledgeable about the business, you have a direct impact on the bottom line, and most companies have an employee stock purchase plan that discounts the stock 15%. These are all excellent reasons to invest in your company. Now if the employees above lost all their savings b/c of this, I think its obvious why bear stearns failed as an investment firm. I bet most of those people have a net worth in the millions, and that this will not ruin their retirement, though may postpone it for a number of years.

  27. bonzombiekitty says:

    I have roughly 50% of my 401k in company stock because I don’t have much of a choice right now. My company does 10% matching (the major reason I work here), and each $ they match goes directly as company stock. Since I contribute 10% of my salary to my 401k, for every dollar I put into some other mutual fund, a dollar goes into company stock.

    You have to be enrolled in the 401k plan for a couple years before you can use the company matched money on something other than company stock.

  28. JustAGuy2 says:

    In Bear’s case, a lot of employee compensation came in the form of stock with a vesting period. For more senior employees (not CEO-level, but not in the mailroom either), 1/3-1/2 of total comp could come in shares, which were locked up for 3-5 years. So, for an SVP making $700k, he might get $300k in stock, which he couldn’t liquidate for five years.

  29. privatejoker75 says:

    what are you supposed to do when your company matches your 401k with their own stock and doesn’t allow you to move your money elsewhere? I used to work for a large homebuilder and having 50% of my 401k in one stock scared me. Luckily i left before their stock went from $50/share to $20

  30. Snarkysnake says:

    @doctor_cos:

    Well,just to clarify…

    If you DON’T want to hold your company’s stock and they “suggest” that you show loyalty to the company (Like China “suggested” that England return Hong Kong), Just open a brokerage account and short an equal amount that you are “suggested” to own. Now,you’ll pay commissions. But, you won’t be trapped in something that you don’t want to own. Your net position (net of those pesky commissions) will be…Right where you started. You’ll get the upside if by some miracle your company is not run by corrupt morons and lose the money on the short side.If it really goes Tango Uniform,you make the money on the short side and take it in the bum on the long side.This last outcome will give you the psychic satisfaction of telling your boss on your last day of employment that you have been betting against him and “them” all along !

  31. Ayo says:

    Well, what if you company’s stock is something like Chevron or Exxon?

  32. Snarkysnake says:

    @Ayo:

    That is no guarantee that you’re safe…Ever heard of a little company called Texaco ? Big oil, gold plated safety ,right ? They lost a huge lawsuit to another little startup named Pennzoil in 1985 and had to declare bankruptcy (in ’87,I think) . Their stock never went to zero,and they were eventually acquired,but employees that retired during the period of uncertainty took a real haircut.The point is,diversification is better than concentration in one stock. Remember- your retirement is hostage to the dumbest CEO that your company will ever hire if company stock is the largest part of your savings!

  33. JustAGuy2 says:

    @Snarkysnake:

    Won’t work in this case. If you work for a brokerage firm, all your investment accounts need to be at that firm or a related firm, so they can monitor your trading activity. Shorting the firm’s stock is strictly prohibited and a good way to get fired, if not pick up an NASD sanction along the way.

  34. satoru says:

    The stock market is a gamble no matter how you put it. Though I did luck out with my 401k. Gillette matched your 401k with Gillette stock. I didn’t really pay much attention to this ‘free money’, until P&G bought them out and I got a nice boost to my investment :)

    Like anything else, diversification is important. Don’t have a ton of money in your company stock, but you can say that about any type of investment.

  35. roger_c56 says:

    @mynameisnate:

    “…when you work in a public company and you play an active role, you have some heads-up on your companies performance based on the overall office environment, as well as wall street’s expectations. I’m not talking about insider trading…”

    Any employee of a publicly traded company with access to information that enables prediction of stock performance is an insider almost by definition, and is subject to lots of SEC scrutiny. The rest of us shouldn’t kid ourselves that we know enough to base both our next paycheck and our retirement income on one company. There are good social and emotional reasons to make some investment in our employers, but we should always be financially prepared for any given investment to tank. That includes our employers.

  36. Beerad says:

    Who the heck is “freemoneyfinance”? Anyway, agree with pretty much everyone that this is bad advice. You should DEFINITELY invest in company stock if it’s part of an employer match or other discounted rate — that there is just free money (er, equity).

    But yes, don’t be overinvested in any one area: diversity, eggs, basket, etc.

  37. Snarkysnake says:

    @JustAGuy2:

    You’re entirely correct. I was referencing companies that are NOT brokerages… And I was assuming that you are not part of executive management. But as usual,I didn’t make it clear…Even that said, you must not run afoul of “material ,non published information” when you do this.

  38. JustAGuy2 says:

    @Snarkysnake:

    FYI, a lot of companies do have policies that prohibit people hedging their company shares or options. If it’s not a brokerage, they probably won’t catch you (since they don’t have the account visibility), but if they did, you’d lose the stock comp.

  39. rioja951 - Why, oh why must I be assigned to the vehicle maintenance when my specialty is demolitions? says:

    @g4lt: Any stock market is very risky, and going with company shares can be deadly if it is not a stable company. While it can be a good choice, depending on their terms, I would try to retain no more than 20% in company stock at ALL times.

    My portfolio base is 50/50, meaning 50% stock and 50% certificates, and in the stock I keep no more than 20% in any one type of stock. When I try to invest more the little sign I placed over my desk always reminds me why I don’t.
    (BTW that sign always draws out at least a chuckle to any one who sees it while going by)

  40. Rectilinear Propagation says:

    @alexanderpink: I’m sure the employees who’s salaries made them worth millions did have a significant impact on the bottom line and knew most to all of what was going on in the company. But that’s not necessarily true for the grunts.

    Take a regular Joe working for a large company. Sure, he knows what’s going on in his own department but he has no idea what it is like in the offices in other states. His impact on the bottom line isn’t that big. It’s not like he can increase the worth of the stock all by himself.

  41. jimmycaynesbluntashes says:

    @JustAGuy2: Working on Wall Street, I can tell you that every Investment Bank has the same policy. It’s the most basic way of keeping employees after their bonuses are paid out from jumping ship. If you do you lose half from your vested stock options; and everyone who says these guys should have known better should realize even deleveraging as much as possible would still have their past 3 bonuses in BSC stock. Please don’t jump to conclusions when you don’t know the facts regarding the situation.

  42. Only listen if you’re smart enough to know that:

    1.) You should still invest in your 401(k)
    2.) ESOPs are still a good idea, generally, even if you sell them quickly after they vest
    3.) Most of the real loss occurs in the form of devalued executive bonuses; funny how we’ll report Jimmy Cayne’s bridge habit but fail to mention the decrease of his net worth from 1.5 billion to ~12 million before JP raised the bid.

  43. I feel like this should be self-evident, but every year when I teach business ethics and we get to the chapter on investing, we end up spending half the class going over WHY THIS IS A BAD IDEA instead of talking about the ethical rules relating to disclosure, etc.

    I live in Peoria, so I’ll get students who work for CAT, invest entirely in CAT (because they believe in the company), and live in Peoria. It’s the trifecta of shitty ideas — if CAT tanks, they’ll lose their job, destroy their retirement portfolio, AND the local economy will be so deep in the shitter it’ll be impossible to get another job without leaving town.

    CAT’s a great company to be investing in these days; its global positioning and the building booms in China & India mean it’s turning in record profits while the rest of the economy flounders. But still, living in Peoria where CAT drives our local economy, I feel like I’m ALREADY invested in CAT, and it’d be a little dangerous to put a bunch of money in their stock when the health of my local economy already depends on CAT’s health.

  44. Trai_Dep says:

    @Eyebrows McGee: Just butting in to say I think it’s pretty darned cool that Peoria is so fond of kittens that they devote their whole economy to it.
    Although, I’m a bit quesy wondering why India and China need all our kittenz…

  45. LynchMob52 says:

    No one on Wall Street wants to take compensation in the form of stock. The fact of the matter is that we all have to and it comes with heavy restrictions. The reason we get restricted stock is that people move from bank to bank all the time and it is a way of preventing people from moving around as much. Also people who have no idea what Investment Bankers do should really just keep their mouths shut, although it does provide some comedic relief to hear some of your responses.

  46. Blueskylaw says:

    The people I really feel sorry for are the top executives. After losing billions of Dollars in stock value, most of them might only be worth a few hundred million now.

  47. shftleft says:

    I’m a fan of this site, but I find it funny how theconsumerist posts finance advice from thestreet.com a day after joining in on bashing Cramer about his statements about Bear Stearns. (Cramer is co-founder of thestreet.com)

    Anyone who has read Cramer knows that this is one of personal finance mantra’s and he started thestreet.com to help individual investors cut out the middle men of brokers (some can be real slime). Cramer details that investing in your own company’s stock is terrible many times throughout his writings.

    Anyone who dabbles in short term investing knows the risks and is willing to take them for bigger gains, bashing Cramer for being too short term is nonsense because he provides sound financial advice to people who can’t afford the risk in many of his books and publications.

  48. @Trai_Dep: Well, with the growth of LOLCats, there’s been a marked shortage in kittehs worldwide, and CAT just has to race to keep up. In fact, Consumerist is doing its part to deplete the world-wide kitteh supply every single day!

  49. uricmu says:

    Umm, maybe I’m dumb but

    A) You get a better rate at buying your company stock than you are at buying just any random stock, or you got them through options over the years, meaning that you never really paid your “Sticker” price on them.

    B) If you work for a major company in a major sector that makes up a significant part of most stock indices,the market goes when your company goes anyway.

  50. Corydon says:

    My old neighbor upstairs used to work for Citi. Had a lot of his 401k tied up in the bank’s stock. So he ended up losing his job and having his savings crash through the floor. I sympathized, but whenever we’d discussed retirement savings, I’d always talked about putting mine into an index fund and citing Enron and Qwest as the reasons why.

    I’m no investment guru or anything, but even I know that you don’t put all your eggs in one basket!

    And, yeah, I do get a nice discount on the company stock where I work, and I do put some money into it, but I’m not going to put myself in a situation where I’m dependent on one company for my financial security.

  51. LynchMob52 says:

    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.

  52. Techguy1138 says:

    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.

  53. Corydon says:

    @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.

  54. Mr. Gunn says:

    Michael Belisle: WOW. Nice post. Kinda sad, though.

  55. aquanetta says:

    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.

  56. humphrmi says:

    @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.