A “Must Do” If You Hold Company Stock in Your 401(k)
April 30, 2012The bottom line is employees must love the companies they work for. It’s not that they wear the company t-shirt and logo hats and drink out of their insulated mugs. That isn’t how I can tell. It’s in their portfolios. When they ask me to review their portfolios, the employees who hold company stock tend to go overboard. I’ve seen 401(k)s with 90% in company stock and many have well over 20%. When we talk about the risks of having more than 10% of assets in one stock, they smile politely and say, “I know.” But many don’t do anything about it.
Maybe that’s because it is familiar and they feel like they have inside knowledge. Maybe it’s because since they work there and can touch and feel the product or they see the service in action, they feel like the stock won’t drop. I know that is a trap and they probably do too. Working for a company and analyzing the stock potential are too different things. The risks are very real — I recently met a woman who used to work for Enron – she sold her Enron stock in her 401(k) at $36 a share and felt like it was the stupidest decision she ever made in her life when the value went to $95 a share. But when the company went bankrupt and the stock plummeted, she felt grateful she sold as many of her colleagues lost everything! While no amount of research can account for a company that commits fraud like Enron, a little bit of research goes a long way when it comes to holding stocks in your portfolio.
In addition to limiting your company stock holding to 10% of your portfolio, take these two actions to protect yourself:
Get an unbiased review of your company annually: Review what others are saying about your company. Don’t just rely on your internal communications. You can get some free basic information by looking up your company stock at Finance.Yahoo.com and reviewing two things: the analysts’ reports and the headlines. There are some free analyst reports that can be found on Yahoo! Finance as well as a list of all the current headlines – what is being reported about the company. For example, I typed in the symbol IBM on the Yahoo finance page and this article showed up, “Final glance: Computer companies” as well as quite a few others. Reading current headlines on your company will help you get outside information on your stock.
Regularly study your industry: You can have the best company in the world but if the industry isn’t strong, the stock won’t be. Understand your industry trends. You can read about your industry in journals specific to your industry (often for free and available in the waiting room of your company offices to read or borrow). Another place that isn’t free but might be worth it is Investors.com. Investor’s Business Daily (you don’t have to get the paper – you can access it online) has an easy-to-read scorecard that gives a report not just on the individual stock but also one on the industry itself. Your 401(k) provider may provide access to additional unbiased investing resources such as Morningstar.com and valueline.com for free or with a discount.
Even if you stay within the guideline of the 10% stock exposure, it’s always important to know what you are investing in! While it is important to protect yourself from losses, what you learn may make you even more proud to be a company employee. This extra studying may cause you to slap a company bumper sticker on your car and wear a company sweatshirt on the weekends. I know the feeling since I personally love my very own logo mug and am often seen proudly carrying my Financial Finesse gear bag to the gym!