While owning a piece of the company you work for can have obvious financial rewards, it can also have potentially greater risks than investing in a diversified portfolio. I have personally experienced the ups and downs of building a large portfolio of employer stock, and I learned a few things along the way:
1. The stock is easy to buy.
- Employers offer systematic savings or deferral programs
- An employee can buy stock as a loan or a percentage of your paycheck
- Possibility to buy at a discount through Employee Stock Purchase Plan (ESPP)
- Employees can invest without paying broker’s fees
- Higher income employees get stock options and/or stock grants for annual compensation
- Stock is offered as an option in retirement accounts
2. By purchasing your company’s stock, you own something familiar. You may feel pride or confidence because of your knowledge of the company.
1. The biggest challenge for employees is that when they buy or receive company stock, they aren’t diversifying their portfolios, and you can get over weighted easily and very quickly.
2. Tax issues are very complex and they vary significantly from person to person. You may be forced to sell all stock immediately upon leaving your place of employment. This can pose a significant tax burden.
3. You incur more concentrated risk because your portfolio and your job are associated with the same company.
Things to consider:
- Over the last 30 years, 25% of stocks in the Russel 1000 lost more than 75% of their original value and didn’t recover 50% of the original value.
- 15% of Russell 1000 stocks last more than 20% of their value on an average year.
- The average individual stock is 2.4 times more volatile than the overall index.
In short, it’s important to not get over-concentrated in your employer’s stock. Diversifying your portfolio while investing in your company’s shares can be a good opportunity to help build potential financial wealth.
*Source: Factset, GSAM
Any opinions are those of Joe Limke and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Russell 1000 measures the performance of the 1,000 largest companies in the Russell 3000 Index. It is not possible to directly invest in an index. You should discuss any tax or legal matters with the appropriate professional.