Owning your employer’s stock is often a measure of your devotion or commitment to that company. But too many people own way too much of it, which can increase their risk level significantly.
If you’re holding a bigger-than-average position of your company’s stock, it’s time to forget devotion and adjust your thinking.
The collapses of Enron, Lehman Brothers and Bear Stearns, along with the huge recent drop in the value of General Electric’s (NYSE: GE) stock, are just a few examples of why you shouldn’t go overboard with stock in any one company – your employer’s or otherwise.
When Enron went under, 62% of the total asset value of the company’s 401(k) was in Enron stock. This situation was a bit unusual because the company did all of its 401(k) matching with company stock and limited when employees could sell it.
At Bear Stearns, one-third of all company stock was owned by its 14,000 employees. When the company went down in the financial crisis, employees took six-figure losses in their retirement accounts.
It got so bad that grief counselors were hired to help older employees deal with the loss.
Since 2016, GE’s stock has lost two-thirds of its value, and employees have ridden it all the way down.
GE was down 56% in 2018 alone, and by the end of last year it had lost more than $500 billion in market value. One-third of that loss was absorbed by the employees in the 401(k).
Amazingly, employees still hold the same percentage of the stock.
When I was still working as a broker and financial advisor, one of my largest clients lost two-thirds of his retirement account because he refused to diversify out of his company’s stock. I did my best to convince him to make changes, but he flatly refused.
In his words, which I think describe the feelings of many employees, “If it weren’t for this company, I’d have nothing. I can’t sell it.”
Stocks and bonds are not mementos… They are not collectibles… They are there for one reason and one reason only: to make money.
There aren’t many guarantees in the market, but I can guarantee you this: If you ignore the rules of diversification and position sizing and allow your emotions to influence your decision-making, you will lose money.
Stock and stock options from an employer are a great way to accumulate wealth – but you must keep them in perspective.