I was reading that you shouldn't put retirement money in company stock. Is there ever a time when it's okay/advisable to invest in your employer stock?
Invest in what you know. Make sure to diversify, but as an employee you probably know the company better than almost everyone on Wall Street. If you feel like the prospects for the company are strong and importantly if the price of the stock is fair (a factor that most people ignore at their own peril), then you should feel comfortable owning shares of the company.
On prospects a few pointers: Companies are at their core a collection of people. The more talented the team and stronger the culture the more likely it is that your company will succeed. If you trust your CEO your managers and your coworkers, feel like they are intelligent and operate with integrity and you feel similarly about other divisions then you are probably in good shape. One caveat is try to avoid an investment if you feel like the long term prospects for the business are difficult. Ask yourself the question: is my company in a dying industry? If the answer is yes, then it's going to be difficult for even the best team to succeed.
On valuation: Valuation is probably the hardest part for a non-professional to understand but you can use the price to earnings ratio as a rule of thumb. If the p/e of your company's stock is above 20x that means it's expensive and there is a good chance that if you wait you'll get a better buying opportunity. Conversely if it is below 10x it could be a great opportunity but could also be a red flag that the company's prospects are weak.
If you follow these 3 rules: 1) invest in companies you understand 2) which are high quality companies 3) selling for reasonable valuations, you're going to do very well as an investor. As an employee, you're in a great position to make these assessments.
Here is my 2-cents:
It is very important to have a retirement plan first, which is properly diversified and allocated.
Second, you can look at how this money is invested, whether it is through individual stocks, mutual funds and/or ETFs.
Your Company Stock would fall under a specific Asset Class Bucket. I am guessing Domestic Small Cap (or Large/Mid). The bigger question is what percentage of your portfolio would you invest in that specific Asset Class and then of that what amount would you put in an individual stock, which could be the stock of the company you work for.
As long as you are not putting all your eggs in one basket, it is generally OK to invest in your company. Make sure it is a component of a bigger, longer term plan.
I have heard financial planners recommend not investing too big an amount in your company's stock as your wages come from it as well.
A simple way of looking at this is to remember that your current income (your job) is essentially invested in your company and if you invest in your company stock for your retirement, your future income is also invested in that same company. May be a few too many eggs in the same basket regardless of your employer's growth potential.
Often an employee will own a concentration of company stock within their 401k fund. This can be very dangerous and over the past ten years a lot has been written and analyzed on just how much company stock could or should be held by an individual. Some companies have historically offered their matching contributions in the form of stock. Your question is one that will get many responses I hope. A thought is that if company stock is available within the retirement plan, you might want to consider owning it only as part of your overall diversified portfolio. A risk is that if you work for a very large public company that your other mutual funds might hold a fair amount of your own company stock too. A key to long term investing is diversification and knowing what you hold.
Dear Amelie, I think Ryan covered all the essential points here. You already are exposed to your company significantly since it's the soure of your livelihood. I typically don't recommend a client have more than 5% (maximum 8% or so) in any one stock. Your decision should be affected by the long-term prospects for your employer, if you think these positive prospects are not yet fully discounted in the current share price (meaning you have further potential upside) and if you're offered any discount to purchase your employer's shares since you're an employee. Some employers offer shares e.g. at a 5% discount. If you already receive company shares as part of your 401(k) "match" I would avoid adding further to your exposure by electing to purchase additional shares.
This is a question I get very often, especially from executives that I work with that receive large portions of their income in company stock. The short answer is, no, it’s not a good idea to hold a lot of company stock from your employer. Do you remember Enron? How about Bank of America or Lehman Brothers or General Motors? I can already hear readers saying, “What about Google and Apple?” That’s a great point and I’m sure that those employees are very happy they own their employers stock.
For most people and most companies, though, too much of your financial life relies on your company, why add more to it in the form of stock ownership? If part of your income comes in the form of RSUs or options, there isn’t much you can do until it vests. For those companies that offer a sizable discount to buy stock in an ESOP plan, it is worth looking into but make sure there are restrictions on how long you have to own it before you can sell it. I could go on and on about the various plans but I’ve already written about RSUs vs Options here (http://nicholasolesen.squarespace.com/blog/rsus-or-options-which-should-employees-choose.html) and each plan is different, so please contact me if you have any questions about your personal company stock plan.
If you have a good handle on your company's financial stability and prospects in the marketplace, I would say YES. Legendary investor, mutual fund manager and author Peter Lynch (One Up on Wall Street) recommends that people invest in companies they know, like and understand. If you know, like and understand your company, its stock can be a great investment for you. That said, don't let your investment portfolio become over-concentrated in your company stock. I would keep it to under 20% of your overall portfolio. You don't want to end up like employees of Enron who thought their company was doing great until it was too late. Also, if you own company stock in your company retirement plan, make sure you are working with a financial advisor who knows about NUA (net unrealized appreciation) and help you take advantage of potential tax-saving opportunities when/if you leave your company and BEFORE you roll over the assets in your company retirement plan to an IRA or another employer's plan.
I work with employees of computer hardware and software companies in Silicon Valley. Sometimes they are so positive about their company's prospects they become overweighted in their company's stock. I know from personal experience it can be difficult not to get caught up in the frenzy.
For every Google there have been Enron, Web Van, @Home Network, etc. Companies can and do go out of business. As Eve pointed out, if you have a lot of company stock, it could reduce your retirement funds significantly.
Yes, investing in company stock can be a good idea, depending on the company, how well you can keep emotions at bay when considering when to sell it, and with the caveat that it should not comprise more than 10% of your overall portfolio. Unless it is a heavy dividend payer, consider investing in it outside of a retirement account if you can. 1) you'll get a low capital gains tax rate when you sell 2) tax rates are lower now than they are likely to be when you retire, perhaps much lower given the direction our country continues in. And, most people who invest well do not typically drop much, if at all, in their tax bracket when they retire. 3) Pres. Obama has proposed limiting the size of retirement assets, a terrible idea but one that may become law at some point. 4) It is easy to get too much of your overall portfolio tied up in non-Roth retirement accounts, including IRAs. That reduces flexibility, locks in the certainty of taxes, and very likely ups the tax rate. Assets held long term in a taxable account do not have to be sold and so do not necessarily generate taxes. I have had many retiree clients with stocks that appreciated tremendously over the years, were then paying a healthy dividend for retirement and did not need to be sold. When the stocks went to the kids it was with zero income tax for the children because of the step up in cost basis at the time of death.
The answers above have all made great points. It is ok to own your company stock either in a 401(k), your own personal account or some type of employee stock plan. You need to be focused on how much in percentage terms it represents in your portfolio. The guidance of between 5% and 8% is sound. I always tend to focus on the conservative side of 5% or less. Barry made an excellent about you are reliant on your company to pay your salary and to own your companies stock does concentrate some of your financial future in one company. If you are optimistic about your companies future I would suggest owning a small percentage in your company. Some companies offer discount stocks plans which might be work checking into.