Should You Invest In Your Company’s Stock?
Now that I’m moving ahead financially, I’m looking to the future. That means that I’m trying to figure out – for the first time – how to invest my money. I do have a few investments in my retirement plans, which are in mutual funds. But I also have thought about purchasing various individual stocks with one of those online investing companies all my coworkers use. Then the prospect of a salaried gig at my current employer came up, and I started to think about using the employee stock purchase program if I was to accept the offer. Is it worth it to invest in your own company’s stock?
The Upside
I know two families that invested heavily in their company stock and they make a great contrast of the ups and downs of the strategy. One was very lucky, one was not. I’m lucky because it was my parents that fared well with their company stock. It just happened to be one of the better companies to invest in during the time that they were working. It paid off. In addition to a reasonably healthy retirement fund, they have a full pension. Don’t get me wrong, they aren’t millionaires, but they aren’t in need, either.
The Downside
The other case I know of ended much differently. The company the family invested in ended up having to file for bankruptcy. The stock they had purchased was effectively gone. Fortunately, they had other investments, and the company managed to hang on in bankruptcy restructuring. However, the retirement plans they had laid were delayed to say the least.
After seeing this, I had concluded that investing in your own company’s stock is essentially the same as investing in any individual stock. It could win, it could lose. I think most people who invest in their company’s stock do so because they think they have some inside information. After seeing what happened to the Enron folks – who were so sure they had it right – lose everything, I’m thinking again.
Insult to Injury
I just read an article in Money that made me think twice about investing in company stock. It made one very good point that I hadn’t considered:
“Buying your employer’s stock, after all, amounts to placing two big economic bets on one company. If your firm suffers an Enron-type collapse – or even a less dramatic downturn – you could lose your job and a big portion of your retirement savings.”
That’s right, your retirement could be shot, along with your job. Ouch. I’m only invested in mutual funds right now, and I think I’m going to stay that way for a while. Job loss is bad enough without further insult.
I take full advantage of my employer’s stock purchase program, but that’s only because the purchased stock comes at a 15% discount off of the lower of the two prices from the beginning and end of the period. I don’t hold onto the stock for very long for the reasons that you’ve outlined. I actually think that my company’s stock would be a great investment right now, but I just don’t want to have any significant portion of my portfolio tied to the same source as my paycheck.
Financial Reflections Replies: That’s an interesting approach. My current employer has the %15 off deal. If I went salaried, I’d be able to buy in. I think your quote is key here: “I just don’t want to have any significant portion of my portfolio tied to the same source as my paycheck.” Indeed, the caution I’ve heard over and over is to avoid having a large portion of one’s investments in any single source.
With a discount, it can be a great idea, but you have to look at where your company is headed. You could be working for the next Home Depot, or you could be at the next Enron. Microsoft had a fantastic stock optio plan in the ’80’s and ’90’s, but their stock hasn’t performed anywhere near that level lately. If you do decide to take advantage of this plan, don’t tie all your horses to the company wagon. If the wheels come off, you’ll be stuck. Diversify.
[...] Should You Invest In Your Company’s Stock? [...]
Nice site. If your company matches or gives you a discount on stock, its a great deal. For instance, I can put up to 2% of my salary toward company stock that they will match dollar for dollar. That’s an extra 2% each paycheck. You just have to decide if you’re going to hold on for the long term or cash out as soon as you can.