The Risks Of Employer Stock

February 09, 2025

One of the biggest risks lurking in people’s investments is having too much in a current or former employer’s company stock. What’s too much?

Rule of thumb

You should generally have no more than 10-15% of your investment portfolio in any single stock. It’s worth noting that an investment adviser can lose their license for recommending more than that.

More than just a stock when it’s your job

So why is this such a bad idea? What if your company stock is doing really well? Well, remember Enron, anyone? While it’s practically impossible for a well-diversified mutual fund to go to zero, that could easily happen with an individual stock. In that case, you could simultaneously be out of a job and a good bulk of your nest egg.

Now, I’m not saying your company is the next Enron. It could be perfectly managed and still run into trouble. That’s because you never know what effect a new technology, law, or competitor can have, regardless of how good a company it is.

Nor does the company have to go bankrupt to hurt your finances. Too much in an underperforming stock can drag down your overall returns, and even a well-performing stock can plummet in value just before you retire. As volatile as the stock market is as a whole, it’s nothing compared to that of an individual stock.

Why do we over-invest in our own companies?

So why do people have so much in company stock? There are two main reasons. Sometimes, it’s inadvertent and happens because you receive company stock or options as compensation. For example, your employer may use them to match your contributions to a sponsored retirement plan. Other times, it’s because people may feel more comfortable investing in the company they work for and know rather than a more diversified mutual fund they may know little about.

A general guideline is to minimize your ownership of employer stock. After all, the expected return is about the same as stocks as a whole (everyone has an argument about why their particular company will do better, just like every parent thinks their child is above average). Still, as mentioned before, the risks are more significant. That being said, there are some situations where it can make sense to have stock in your company:

When it might make sense to keep more than usual in company stock

1) You have no choice. For example, you may have restricted shares that you’re not allowed to sell. In that case, you may want to see if you can use options to hedge the risk. This can be complicated, so consider consulting with a professional investment adviser.

2) You can purchase employer stock at a discount. If you can get a 10% discount on buying your employer’s stock, that’s like getting an instant 10% return on your money. If so, you might want to take advantage of it but sell the shares as soon as possible and ensure they don’t exceed 10-15% of your portfolio.

3) Selling the stock will cause a considerable tax burden. Don’t hold on to a stock just because you don’t want to pay taxes on the sale, but if you have a particularly large position, you may want to gift it away or sell it over time. If you do the latter, you can use the same hedging strategies as above.

4) You have employer stock in a retirement account. This is a similar tax situation because if you sell the shares, you’ll pay ordinary income tax when you eventually withdraw it. However, if you keep the shares and later transfer them out in kind to a brokerage firm, you can pay a lower capital gains tax on the “net unrealized appreciation.” (You can estimate the tax benefit of doing so here.) In that case, you may want to keep some of the shares, but I’d still limit it to no more than 10-15% of your total portfolio.

5) You have a really good reason to think it’s a particularly good investment. For example, you work at a start-up that could be the proverbial next Google. It may be too small of a company for analysts to cover, so it may genuinely be a yet-to-be-discovered opportunity. In that case, go ahead and get some shares. You may strike it rich. But remember that high potential returns come with high risk so ensure you’ll still be financially okay if things don’t pan out as hoped.

The ups and downs of the stock market typically get all the media and attention. But your greatest investment risk may come from just one stock. So don’t put all your eggs in it.

Is Too Much of a Good Thing a Bad Thing?

December 02, 2016

During some recent conversations with employees of a publicly traded company, the topic of company stock was very popular.  This company’s stock price has tripled (300% gain, point to point) in the last 5 years, while the Dow Jones Industrial Average has increased over 50% (from ~12,000 to ~19,000).  What that has done to employee 401(k)s, for those who contribute to company stock inside the plan, is ratchet up the percentage of company stock beyond the 20% limitation that the firm’s policies allow. For those who have participated in the employee stock purchase plan (ESPP) or who receive some form of equity compensation (restricted stock, stock options), their company stock holdings could even be higher.  The question around their building during these conversations was “do I have too much company stock?”

My answer to that question was almost always “it depends!” Most financial planners will recommend that no more than 10-15% of one’s portfolio should be in employer stock.  Employees at Apple or Google would disagree with that, while employees of MCI WorldCom and Enron think that is probably 10-15% too much. While that rule of thumb is out there, it is often misconstrued.

I spoke with one employee recently who had 40% of her 401(k) in employer stock and she was concerned because her financial advisor told her that was far too much to have. When we broadened the scope, from just her 401(k) to her total portfolio, we found that only 5% of her total wealth was in employer stock. She had most of her money in CDs at her local bank and in a portfolio of bonds with her financial advisor. Her employer stock was almost her only growth asset. We did talk about more broadly diversifying her portfolio and about allowing her financial advisor to know that she had the CDs at the bank too so that his recommendations could be with the full knowledge of her situation.

The lesson: When looking at employer stock, look at the whole picture not just one account.

I spoke with another employee who had 15.1% of employer stock in his 401(k) and his plan provider had a big red warning sign on his 401(k) one day. If the stock price fell and the stock became 14.9% of his plan, the red warning sign would go away the next day. He was right on the edge, as he viewed it – and as his 401(k) plan provider viewed it.

He wasn’t too concerned because he is highly optimistic about the company’s future. During our conversation, he convinced me that he totally understood the risks associated with having one stock be too big a portion of a portfolio. When I asked a follow up question about equity compensation and the ESPP, he told me that an amount equal to his 401(k) balance was sitting in company stock through the ESPP and restricted stock grants.

So 65% of his investable asset base was in company stock, and this company is going through a merger that may be wonderful or dreadful for the company stock price. Upon realizing that, I asked “Are you more concerned about your stock price doubling right after you scale back your holdings or the stock price falling by half if you don’t scale back your level of holdings?” He was far more concerned about the stock price falling if the merger didn’t get approved or if the overall stock market tanks after 8 years of increases so he opted to scale back some of his holdings by selling ESPP stock and paying off his mortgage.

The lesson: Be aware of where the overall markets are, what your risks are and the full scope of your holdings.

To answer the question of “How much employer stock is too much” requires a fairly thorough understanding of your financial life and goals, the economy, current events/news regarding the company and your willingness to accept large losses in an attempt to make large gains. I’m certain there are people at Google who wish they could buy nothing but Google stock, and I know for sure that there are people who once worked at Enron who wish they had never owned a single share of Enron stock. Each person is different, but understanding your specific situation and the risks and rewards of your employer stock can help you come to the right answer.

 

 

Three Investment Mistakes the Trained Eye Can Spot

May 14, 2012

Recently, I had the opportunity to have a series of one-on-one meetings with employees called Ask-a-Planner sessions where the employees could ask me any question on any financial topic they wanted. Fortunately, they didn’t “stump the planner!” Many people used their time as an opportunity to have me review their allocation in their 401(k).  While most of them had an asset allocation that was a fit for them, some of the statements had huge rookie mistake red flags that I’d seen before. Continue reading “Three Investment Mistakes the Trained Eye Can Spot”

A “Must Do” If You Hold Company Stock in Your 401(k)

April 30, 2012

The 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.  Continue reading “A “Must Do” If You Hold Company Stock in Your 401(k)”

Taking Stock of Options and Awards

October 11, 2011

I recently spoke to a freshly minted MBA graduate who was so thrilled to have had landed her first job in this tough job market, but her icing on the cake was a sign-on bonus equal to ½ of her first year’s salary.  The catch to the bonus was that it was given to her in the form of a restricted stock award, so she had called me to find out the details.  She was very confused, because in addition to the stock award for the bonus, she is also eligible for a restricted stock matching program AND stock grants. Continue reading “Taking Stock of Options and Awards”

You Have HOW MUCH of Your 401(k) in Company Stock?

August 23, 2011

With the recent roller coaster ride of the stock market, many employees have taken a closer look at their asset allocation within their retirement plans, and to the surprise of many, they find their investment strategy is way off base. Continue reading “You Have HOW MUCH of Your 401(k) in Company Stock?”

The ABCs of an ESOP

April 26, 2011

Over 11,000 companies offer their employees some type of ESOP, which stands for Employee Stock Ownership Plan.  Typically, an employer will offer the ESOP as all or part of the retirement plan for its workers as an incentive for company loyalty, higher productivity, and greater employee participation in the workplace – but many employees are not familiar with the ins and outs of how an ESOP operates. Continue reading “The ABCs of an ESOP”