If the failures of Enron and Bear Stearns weren’t proof enough that you should never, ever be too vested in your company’s stock, we’re learning Lehman’s (Stock Quote: LEH) workers risk losing some $10 billion in losses from their LEH holdings if the company tanks. Here at MainStreet, we suspect it’s again to visit the Do’s and Don’ts of investing in your company’s stock, be it through an employee stock purchase plan or an employer-sponsored retirement portfolio (aka the 401(k)).
Do Invest (But Don’t Load Up).
If you can purchase your company’s stock through an employee sponsored retirement account, go for it if you want, but treat it like any other asset in your portfolio with moderation. Understanding that the best portfolios are well-diversified to help spread risk, avoid investing more than 10% of your 401(k) in any individual stock, even if it’s your company’s and you think it’s the best thing since sliced bread. Remember to take emotion out of investing in your company’s stock. More risk-averse investors should limit their exposure to each stock to no more than 5%. If your employer offers a matching program, keep that in mind so to never go overboard. Putting in 10% yourself, plus a percentage match by your employer, and you’ve gone too far than you should.
Do Not Get Emotional.
You love your company. You want to work there until it’s time to retire. Your boss is awesome. Your pay is great and you can never see how this company could fail. Snap out of it! It’s easy to get emotional over stocks but that’s never been a winning strategy to make money. That said, it is okay to incorporate your judgment when deciding how much to invest in your company’s stock. After all, you work there day in and day out. You get to witness first-hand how hard working (or not) the employees are, how managers perform and how well your firm is prepared to fight competitors. Just make sure you complete your homework by taking notes during quarterly earnings calls, looking up past financial statements and analysts’ research.
Do Watch Your Higher-Ups.
If your exposure is less than 10% and you see that the CEO and board members are scooping up shares of the company, that’s typically a sign (though not a guarantee) that they believe the company’s worth more than its current market price. Better still if the C-suite is buying shares of the company stock out of their own pocket, as opposed to through their options or grants. That may signal they’re really convinced the stock has brighter days ahead and that it may be a swell time to raise your position in the stock, too. But again: Not to more than 10%.