What Percent of Retirement Should Be in Company Stock?
Many employees accumulate company stock as part of their retirement plan. There is no set percent of your retirement assets that should be in company stock, but several safety and return considerations can help you decide the percentage of company stock you are comfortable holding as retirement assets.
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False Sense of Security
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Just because you work for a company or because its stock "has been good to you" (has appreciated in value) does not mean that the company stock is safe. You have no control over your company's stock price. Any stock can go down to zero at any time for any reason (and very fast), taking your money with it, as Enron, WorldCom, Bear Stearns, Washington Mutual and other high-profile bankruptcies have demonstrated.
Greed
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Many people believe that they can make more money in company stock than in other options, especially if the stock has had a long history of appreciation. You can make more money in an individual stock than in a diversified fund, but you can also lose more. A stock that has been rising for a while may go into a long-term decline or simply go nowhere for years. Picking stocks is difficult, and you must have solid reasons to believe that your company stock will outperform other stocks.
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Added Risk
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The added risk of having a large amount of your assets in company stock is that you already depend on your company for your paycheck. Even if you've worked there for a long time, there is no guarantee that you won't lose your job tomorrow. The same applies to the stock: management can run the company into the ground at any time and take your stock holdings with it.
Asset Allocation
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View your company stock holdings as part of your overall portfolio and apply the same safety and diversification rules based on your financial plan. Prudent money management means never risking more than 2 percent of your capital on any one trade or position. If you accept the possibility that you may sustain a total loss in your company stock, you should not have more than 2 percent of your portfolio in it. If you can cut your losses at 10 percent (that is, you can sell your company stock at any time without restrictions), you can have up to 20 percent of your portfolio in company stock.
Account Options
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What you can do with the company stock depends on your account options. If you get company stock grants as part of your retirement package but do not contribute your own money, whatever you get is fine because it's pure profit. If you contribute your own money toward company stock purchases, you should have more control over what you can do with it. Base your allocation on your overall financial plan and adjust it periodically as needed.
Protection Strategies
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You can have a large percentage of your assets in company stock if you have adequate protection strategies in place. A high-end wealth protection expert can design a plan using options and derivatives to protect your company stock holdings.
If you can sell the company stock at any time, and you have a penchant for stock trading, you can treat your company stock like any other stock and base your sell (or buy) decisions on the stock's performance.
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