Company Stock Allocation

[treypar]

I have 30% of my net worth in company stock. It has appreciated extremely well recently. I have the option to my reduce my holdings now. I have heard not to have more than 4 to 5% in company stock. Any suggestions on a target allocation?

 

[Olav23]

Is it a public company? Are you able to purchase options against it as insurance to hedge the downside risk?

 

[Arc]

I suggest no more than 10%. I sell the maximum amount permitted as soon as it's available.

 

[jdmorton]

Most Financial "Experts" Recommend You Have...

little of your own company's stock in your 401(k) plan - I'm assuming that is what you are talking about with regard to allocation. Their explanation is, you are already relying on the company for your salary and other work benefits - do you really want to put everything into one basket?

I work for a major Mega-Corp with a publicly traded stock. For the first 10 years that I worked there, holding a lot of company stock would have made me a lot of "money" in my 401(k) - it split 2 for 1 and then 3 for 2. For the last 6 years, I would have probably lost my shirt if I was heavily invested in it. It has been down significantly (from its high levels) and has remained flat. In fact, at one point it was up 16% this year and still had not hit a 52 week high.

I get my 401(k) company match in it, and then transfer it to the funds I want to invest in at least once a year. I haven't transferred for the past year, and I think I am up to about 4% company stock in my 401(k) - time to "dump"

But, that is just me

 

[DRiP Guy]

Be sure to tote up your total exposure to your company, even if you love it and it is doing well.

If you have options, restricted stock, ESPP, company 401(k)match in corp funds, perhaps even brokerage shares, plus obviously your employment, you may want to do what I did and stand back and figure out how to liquidate and/or reallocate some of that. I felt I had far too much of my future hinging on just one node.

 

[Texas Proud]

I have 30% of my net worth in company stock. It has appreciated extremely well recently. I have the option to my reduce my holdings now. I have heard not to have more than 4 to 5% in company stock. Any suggestions on a target allocation?

Alta... I agree with Arc with a slight change....

I own about 15% in my company stock (when you take into account that it is held by a bunch of mutual funds also).... but some of that is stock options.. and I discount these as they are leveraged...

Also, are you aware of the ability of you taking out stock from your 401(k) at your cost basis and not the current value I have a big gain in a lot of stock in my 401 and want to NOT pay regular income taxes on it... so I will keep this even if it grows to a higher percent of my portfolio...

 

[runchman]

Also consider, if you weren't working for the company, would you choose to invest xx% of your net worth into it?

In other words, separate the investing decision from the fact that you work there.

my 2 cents worth,

John

 

[Animorph]

I was comfortable trading my company stock for stock in companies with similar prospects back when it was about half my net worth.

I have gone as high as 50% company stock in our 401k's for relatively short periods when I though it was very undervalued. That was a good move both times, and I jumped out after it became fairly valued. That (undervalued) doesn't sound like your situation. If you have had a good run up, I would take maybe half off the table.

10% to 20% seems OK, depending on how you feel about the company, the risk, and how often you have a chance to buy/sell. I have a trading window for my current company stock, so I get a chance to change allocation only once a quarter. Currently I'm at 0%

Dan

 

[SteveR]

The percentage is a personal risk tolerance factor only you can know.

The risks are obvious:

You work for the same company you also have 30% of your investment worth with. Remember Enron? Ask anyone of the former employees how they feel about having too many eggs in one basket.

Life is about risk. Your tolerance for it is a personal matter and one you need to understand. My net worth took a massive hit when my former company stock (which had been a model performer for 40 years) took a sudden and unexpected hit due to legal action no one saw coming. 9 years later it is still "damaged goods" and has not recovered. We had our stock options, 401k and both our jobs tied up in the company. We were luck. I moved some stuff out of the 401k before "it" hit the fan so our loss was limited to (only) 35-40% of our retirement funds at the time. It still delayed our ER plans by several years and my options will never see the light of day.

Things always look great when the stock goes up. But gravity works on everything...including stock prices.

 

[chinaco]

My wife works for Mega Corp which has an PST/ESOP. @ 50 she was able to move 60% out of the company stock to equity mutual funds. Before that she sould have move portions to a intermediate bond fund or money market account but not equity.


She move 60% out of the company stock @ 50. The remaining 40% has to wait until she retires.


However, there is a little of a silver lining. It is my understanding that there is a tax law (manuever) that she can do when she retires that might save some taxes. There are potential benefits of special income tax treatment of net unrealized appreciation (NUA) under Internal Revenue Code (IRC) Section 402(e)4.


I read about this in a FPA journal article.

http://www.fpanet.org/journal/articles/2004_Issues/jfp0204-art7.cfm?renderforprint=1

Anyone have any experience with NUA?

 

[audreyh1]

IMO nothing wrong with 30% of your net worth in company stock if you are young and if the company is has potential for serious appreciation. If you are getting close (within 5-10 years) of retiring, that's a whole other matter.

4 to 5% is so low that there is little chance for a "windfall". But if the company is fairly mature, there is perhaps not much chance for a "windfall" anyway and no reason to hold a large allocation.

You can decide how to divest over time. Perhaps every time your company stock doubles, sell 1/3 of it, or something like that. It can keep increasing, but you are pulling some off the table as it reaches new highs.

Keep saving as much as you can so that you aggressively build up the other net worth as well.

This all really depends on the company, your timeline and your risk tolerance. Having stock options in a young company, or an opportunity to buy in as part of a startup, is one of the fastest ways to build wealth today. It's also an extremely risky way to build wealth. But it may be an opportunity to "hit one out of the ballpark".

Audrey

 

[AltaRed]

Also consider, if you weren't working for the company, would you choose to invest xx% of your net worth into it?

In other words, separate the investing decision from the fact that you work there.

That is how it should be looked at. Familarity and comfort tend to cloudy prudent investing decisions. I always tried to keep my stock holdings in the company I used to work for at no higher than the highest I would on any other stock. I always exercised my options (exercise and sell) when company stock value was cyclically high. It just isn't smart to put so many eggs in the company basket.

 

[clifp]

IMO 10% is good, 20% is ok, and more than 20% is getting to be not ok.

There are so many ways to acquire stock in the company you work for stock options, 401K company matching funds, ESOP etc that it can be hard to keep below 20% especially if the stock is going up. (Full disclosoure at one point in my career Intel was 75% of my net worth).

I therefore take every opportunity to sell your company stock, at a tax advantaged method (i.e. long term capital gains or within a 401K).

 

[Texas Proud]

I think it is also something to think about (like the other poster said)..

What will the percentage be in a few years If you drop to 10 now, will it continue to drop because of new savings and then you wished you had more... How much are you saving and will the percent go down over time because of your new savings.. now, this assumes that you have stopped putting new money into your company...

(bad wording, but I am tired and don't want to fix.. sorry)>.

 

[Tadpole]

Also consider, if you weren't working for the company, would you choose to invest xx% of your net worth into it?

In other words, separate the investing decision from the fact that you work there.

my 2 cents worth,

John

I'll put in another vote for this approach. If your company is not one that you would independently chose to put 30% of your investments, then your company is not where 30% of your investments should be. It is immaterial that you work for them when deciding to invest.

 

[treypar]

Thanks for all the great comments. I have decided to reduce my holdings. I expect to retire in a few years and the stock has seen very good appreciation recently.

 

[lrak]

An issue I hadn't considered until today when it happened to me is ...

The value of the ISOs and stock I've kept from the ESPP, was under 5% of my networth a month ago. The great news is that its gone up a lot in the last month. The down side is that we are being bought out by a private equity firm so it all gets liquidated this year preventing me from getting the child tax credit and probably pushing me into the land of the AMT.

Having too much invested in any one place means you can't control the tax implications if you are forced to sell. In the end I'll happily take the premium price they are paying, I just wish I got to spread it out over a couple tax years.

 

[Gone4Good]

I keep selling it and every 12 months I vest more. So in a sense, I'm always long the company stock - even when I don't currently own any. In my case, the individual stock is 2-3x more volatile then the market with no better returns. Why bother holding any I don't have to?

I'd be hard pressed to find a reason why I'd want 30% of my net worth tied up in one company, unless I was the founder. That kind of concentration is a good way to make a fortune. Its also a very good way to lose one. With my money, I'll take the slower, surer, path to financial independence by embracing the only true free lunch in finance . . . Diversification.