How much company stock is too much?

[imp4]

Ok folks, I'm looking for opinions and insight about company stock contained within an ESOP at a privately held company.
Our bi-yearly valuation just came out and the stock has been on a tear the past 5 years.
I'm up to about 20% of net worth and I'm getting uncomfortable. My investing policy statement limit is 20% so there's no question about diversification when the window opens up later this year.

Other pertinent info:
Age: 45ish
Salary: $100k
Yearly spending: $75k
Offspring: 18yo and 16yo (one in college the other on the way)
Status: Happily divorced
Retire date: 2024ish
TNW: $1.3M+ (20% company stock)

Once again, this isn't a question of 'should I diversify' but rather a request for a discussion around allocation limits.

Thanks!

 

[copyright1997reloaded]

So about 260K in company stock.

Suppose when you went into work Monday morning, there was an expected announcement that the CFO had reigned. Later in the week rumors start happening that there are serious issues with the books being cooked. The stock starts to fall, but before you can react trading is halted. At the same time, the SEC announces an investigation.

As the situation worsens, all new stock options are frozen and the company starts laying off employees, including you.

Yes, I know you mentioned it is privately held. That (to me) makes it even more 'interesting' in terms of valuation of the stock.

So, would the loss of that 260K and your job change your retirement plans and lifestyle. If so, by how much? Are you located in an area that if the company failed, housing would be impacted? Those are the kinds of factors that should go into your thinking regarding single stock exposure.

 

[pb4uski]

My view would be 5% at most, especially since it is privately held, but there may be constraints in your plan that limit your flexibility. Think of Enron, WorldCom, GM or even GE and how you would feel if 20% of your NW went poof!

That it has recently been on a tear might be cause for concern depending on why it has been on a tear and how they are calculating value.

 

[Dtail]

Do you have a good Stable Value option in your 401k? This option could be very rewarding and be part of your non equity portfolio after you retire.

 

[imp4]

My view would be 5% at most, especially since it is privately held, but there may be constraints in your plan that limit your flexibility. Think of Enron, WorldCom, GM or even GE and how you would feel if 20% of your NW went poof!

That it has recently been on a tear might be cause for concern depending on why it has been on a tear and how they are calculating value.

Yes, we're limited to a 20% diversification amount and my plan is to elect to do so at the twice yearly windows for the forseeable future.

Once again, I don't need to be convinced to diversify out as this is a foregone conclusion.

My original question is around allocation percentages and people's opinions and insight.

Thanks!

 

[pb4uski]

I hear you, but your extent of comfort with a certain % of your net worth going poof is a significant factor in deciding what your target percentage should be... different people have different risk tolerance.

You might also search for other threads on the topic as I recall this topic does come up occasionally.

 

[HarveyS]

Personally, my investing philosophy does not allow any single stock to be >5% of my total net worth. I've had a few winners, and I sell some shares as needed to keep below 5%. I review my asset allocation and make adjustments 2x/year.
I am roughly 75% equity, 25% bonds. I do own mutual funds that exceed 5%, but not individual company shares.

I feel that company stock should be looked at differently, and even 5% is too high. You likely rely on the company for salary, medical, dental, vision, retirement match, pension, disability insurance, life insurance, maybe a company car and cell phone, etc.. Add all that to a large holding in company stock and you are placing a great many eggs in a single basket.

Edit to add: You need to make a plan, write it down, and execute. Being close to the company you will tend to see the positive and overlook the negative. Don't fall into that trap. Pick the percentage you are comfortable with, and then execute your plan.

 

[FIREd]

At one point, my wife's company stock represented over 60% of our net worth if I remember well. Making a concentrated bet can pay off. Or it can backfire. For us, it paid off and it helped us retire at an early age. We never had an allocation limit for her company stock. First, that stock was very volatile and our allocation would change frequently. And second, we were limited in how and when we could dispose of it, so we could not really control our allocation to the stock anyway.

 

[corn18]

My IPS limits my stock exposure to my employer @ 0%. I have $750k of unvested RSU's and that is enough exposure for my taste.

With the clarity of hindsight, it was the wrong policy (I missed out on $400k+ of gains), but so was my 60/40 AA for the last 10 years. Left to my own devices, I would have lost way more than that, so I stick to my IPS.

 

[Souschef]

I only have one word-ENRON. So many employees got shafted when the company collapsed.

 

[FlaGator]

Zero.

Understand you may not have a choice, but look at all the other aspects of your current and future NW are tied to that company-compensation, health care, life insurance, etc.

I worked for a company highly leveraged to residential real estate. Sold company stock as soon as I could, and felt owing more property than my residence was adding to the residential RE risk. Investment $$ were consciously deployed elsewhere. In the last RE downturn, compensation was cut and salary increases were deferred across the board. Glad I didn't have more exposure than I did in 2008-2011. Continued to invest in diversified stock funds then, and it has paid off. May have done as well with the company stock, but I was more confident in the long term future of the broad market than my industry back then. Slept better at night in those years.

 

[Oz investor]

that would depend on the company

when i had company super at one stage it was 66% invested in that company , which made me EXTREMELY uncomfortable ( as i classed it as a cluster of misfits )

needless to say i have left that company ( and liquidated the super fund ) and my judgment has proved sounder than that of the international business(es , now )

i would say let your 'comfort-factor ' be your guide

personally 10% is my largest holding , but that was inherited and the current management seem to be exceptional in finding new ways to stumble ( face first into the dirt )

 

[gcgang]

If you want to hit a home run, get all you can (see Bill Gates).

If you want to just be comfortable, limit it to 10%.

 

[RunningBum]

For me, it worked until it didn't. I wouldn't have hit FI in my mid 30s without a huge concentration of company stock, mostly options. Then it dropped a lot and I was less than FI and it took a few years to recover. I don't regret the heavy concentration when I had virtually nothing, and I did take a little off the table a couple times on the way up. But I shouldn't have stayed greedy once I had what I needed. Live and learn. Few companies did as well as mine did, even with the big drop. Mine is probably not a story to copy.

I think it's really hard to take an honest look at your own company's prospects. They may be good but chances are your CEO is a good salesman and has everyone convinced they are better than reality.

You have a stated allocation limit, what are you looking for from us? You want us to tell you what yours should really be? Not for me to decide for you. Mine? All mutual funds, so my biggest holding is APPL, whatever % of Total Stock Market Index it is, and whatever part that fund is of my AA, plus the little bit it's in a couple other funds I hold.

 

[Oz investor]

i suppose i SHOULD clarify on my largest holding

that 10% is directly held , the company concerned is a top 20 stock ( in Australia ) so i do have additional exposure via some LICs and ETFs ( but certainly not another 10% worth , maybe 3% or 4% )

that would be a factor the original poster is not currently facing

 

[MRG]

I didn't have a chance to diversify for many years. Eventually Megacorp became 50% of our assets. This coincided with the financial crisis and Megacorp's new willingness to allow us to do rollovers.

I sold 10% immediately and slowly scaled out the the majority over a couple years. Megacorp was recently acquired and my remaining 1000 shares bought for a nice price.

Now if you're into woulda, shoulda, coulda games; hanging on to all the Megacorp stock I'd held did do a couple million dollars better than a diversified portfolio. However sleep has a huge benefit.

Right now I'm considering selling a little Apple, as it's too much of my portfolio. Ah, maybe next month.

 

[Conundrum]

5%. That being said, hypocritical on my part as I had huge holdings in my companies stock in 401k and RSUs. In hindsight it was reckless. I went for the home run and that stock got me to FIRE. I’m grateful but it was foolish.

I have zero company stock now. BTW. I sold it all in April and it has had a run up of nearly 60 points since my sale. Sure, I’m disappointed but I’ve made piece with it. What if it would have dropped 60? I’d still be working

 

[scrabbler1]

The exploding value of my company stock (ESOP) was a big reason why I was able to retire nearly 10 years ago. Its value grew by 3000% from its inception in 1997. This was privately held stock available only to us employees.


That being said, when we were allowed to diversify (up to 25%) starting in 2002, I did so. Enron and some other failed companies were very recent and on my mind when I made that decision. In 2005, we were allowed to diversify up to 35%, so I sold some more. And when stock was used for 401k company match starting in 2007, we were allowed to diversify all of that.


After that, as my ER plan come into shape into 2007, I didn't do any more diversifying. By then, only a few shares were eligible anyway.


I realize I cost myself some extra money when I cashed out my company stock upon ERing in late 2008, just before the stock price took a considerable drop at year's end. (It took a small drop at the end of September, just before I cashed out.) But in return, I had some more money in the 401k which became a rollover IRA. And, as others here have mentioned, I did sleep a little bit better knowing I didn't have nearly as many eggs in the huge ESOP basket as I could have had. Despite all my efforts at diversifying, the ESOP value was just over 50% of my total 401k/ESOP holdings when I ERed.

 

[bigcmagor]

Two years ago, I mentioned in a post that my private employer share holdings amounted to 30%+ of my net worth and got some strong advice to diversify. I've held the position and the stock has increased 40% since - adding four years of living expenses and enabling me to throw in the towel next year, unless I chicken out.


In my case, the value is a fixed fraction of net worth and we haven't lost money since 1981, so I've drawn comfort from that. It also helps being the first one to see the income statement each month and to have confidence in the quality of the data.


Part of my decision to stay over exposed in this respect is not seeing a better opportunity for the proceeds if I were to divest.

 

[Luvdogs]

Our company match was required to be in company stock. After Enron went bust and they changed the rules, I almost immediately moved about 95% of the match to other categories.

Stock kept going up and up, made it to over $100---until it didn't. 2008 came and at one time it was down to $3. Now it is around $50. We would have taken a giant hit as both DH and I worked for the same company for 20+ years.

So I would go about 5%--as they say if the company goes kaput, you not only lose your job but your stock.

 

[brett]

I would say the limit would be up to the amount that you could loose without it threatening you retirement plans or your finances.

At one point, prior to early retirement, I was overinvested ($1M+) in stock options and RSU's. I did start to exercise options but always in my mind was the so called target price that the market kept talking about.

We spent a fair amount of time with our fee for service FA. He looked at me and said how would loosing the current value of those options and RSU's impact
your early retirement plans. I redoubled my efforts to exercise the options. Positive result. Stock peaked at 54, then went down to 17. Never got a sniff at 75. Had I held on, like some colleagues, our financial situation would be much different. The RSU turned out to be dogs, the options were big winners.

 

[kgtest]

Based on my own risk appetite (tolerance) 20% of total portfolio is individual equitie(s),



based on advice from ER forum, I hold only 5% of one single equity. That includes my ESOP. So I just don't buy into the ESOP, plus the market (and my (portfolio) is outperforming my bank I work for, and has been past few years.



Now, with that said, 10% of my total portfolio is AAPL, again part of my risk appetite.



I kept telling DF to roll his ESOP over but he was emotionally attached to the money. Watched it go from $15/share to $7 a share this year alone when they started parting out MegaCorp.



Don't invest with your emotions.


The bright side was that he only had about 10% of his entire portfolio exposed to the risk so it "could have been worse".

 

[RobLJ]

DW was working for Dynegy at the time, who also required the match be in company stock and you couldn't sell the match.
Dynegy bought Enron's pipeline and then went bankrupt, so that beautiful "match" went from 40 to < 1$ in about 3 months time. I had told her that if we had the money and I knew what I was doing, I would have sold option on Dynegy, before the trouble hit.


So, based on our experience, I think anything more than 5%-7% in company stock is a high risk. My youngest works at MSFT and keeps selling his options and diversifying, to avoid the risk.

Our company match was required to be in company stock. After Enron went bust and they changed the rules, I almost immediately moved about 95% of the match to other categories.

Stock kept going up and up, made it to over $100---until it didn't. 2008 came and at one time it was down to $3. Now it is around $50. We would have taken a giant hit as both DH and I worked for the same company for 20+ years.

So I would go about 5%--as they say if the company goes kaput, you not only lose your job but your stock.

 

[HI Bill]

Right now, 21% of my invested assets are in my company ESOP. I don't have a choice, it can't be sold, and can't be diversified, until at least age 55 (diversification rules kick in) or paid out until age 62. At least, my ESOP is mostly stable, and doesn't tank when the markets do (the company has a broad diversification of services and clients).

If I had my choice, I'd hold no more than 5% in company stock. For the company I work for now, I used to invest using the ESPP, but the stock is too volatile, and I sold it all!

 

[Ronstar]

Yep I know the feeling. My stock ownership was about 20% of my net worth and it made me nervous too. Especially as I neared retirement. It all depends on the safety of the company and it’s stock, but I wouldn’t want to be at more than 10% 6 years from retirement