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]