Caution when investing in employer stocks
Lately I’m reading the book “Nudge” by Richard H. Thaler and Cass R. Sunstein. Mr. Thaler is an economist, and won the Nobel Prize because of his research on behavioral economics.
One section of the book talks about Company Stock. One employee of former Enron invested all his money into the Enron stocks, during his 30+ year career. One time his investment peaked to $1.3 million.
He retired at the age of 68 in the year 2000. You know rest of the story: after Enron was gone, so was this poor guy’s investment.
This is why I like to talk about investing in employer stocks today.
There is nothing wrong investing in the employer stocks. The question is how much is appropriate, from the risk point of view. Some people say, don’t hold more than 10% of your retirement money in the employer stocks. I would be more conservative: keep it to less than 5%.
I know, you could argue that, if any employees of Apple or Amazon have been investing all the money to their employer stocks for the last 18 years, they are all set today financially. I see your point. I wish we all had that luck.
But, how many companies have been performing that well as Apply and Amazon? Probably not many.
And in the past, some companies did go under. Just name a few: Enron, WorldCom, Lehman Brothers, Bear Stearns, etc. Many employees were hurt badly because they invested too much on the employer stocks.
Why investing in employer stocks is attractive?
There are many reasons behind why we like to invest in the employer stocks.
Employees could get some discount when purchasing the employer stocks. Who doesn’t like discounts? The discount could be available when you buy the stocks using the pre-tax money like 401K, or after-tax money. It’s convenient the money is deducted from each paycheck.
Loyalty to the employer:
For those employees who have been with the company for a long time, there is a deep connection there. They feel that, the company has been treating them so well all those years. As a return, he/she is very loyal to the company, which is good.
One way to express the loyalty is to buy the employer stocks and to support the business.
Some employees really feel they know the company much better than outsiders. I may be wrong. But I feel the truth is: not necessarily, and that’s blind optimism.
They may know the group or department where they are working at. But, for the company’s overall business and financial details, most of the employees are probably on the same page as outside investors. Everyone gets the quarterly earnings report at the same time.
Quite a few employees may have access to the insiders’ information. But our federal laws prohibit anyone from trading stocks based on the insiders’ information.
As a result, the employer stocks should be treated the same way as all other individual stocks. No exceptions.
Why should we exercise caution when investing in employer stocks?
It all comes down to risks and diversification. The rule of thumb is: don’t put all the eggs into one basket.
You don’t want to put most of your money into a single company’s stocks, right? You know that’s too risky. The same rule applies to your employer stocks. It is risky, too.
To reduce the risks, people choose to invest on multiple products: different individual stocks, mutual funds, bonds, real-estate, money market accounts, etc. They may not get rich quickly, but the bankruptcy of one company won’t hurt them that bad as the Enron employee mentioned above.
When the economy is horrible, people tend to be more cautious. The bad stories are just around us. But when the economy is good like right now, people could become more complacent about the risks.
Be cautious. Please keep in mind that, every company could go well, or bad financially. It doesn’t matter about the company size, the nature of the business, the past performance, etc. We saw it.
When the business of your company is struggling, you worry about the job security for sure. That’s already very hard to you. The last thing you should worry about is your investment.
How to make that happen? Don’t invest too much on the employer stocks.
Diversify, and diversify. That’s the only way to protect your invested money. Nobody can do it for you. You have to do that yourself, in order to protect you and your loved ones.
And it’s not hard to do. If you need help, talk to your coworkers, HR department, or anyone you trust. Try to understand your investment options, and move some of your money to the less risky products.
Don’t wait. You don’t want to be that Enron guy I mentioned at the beginning, who lost everything at the age close to 70. That’s too miserable. You deserve much better.
Questions to discuss: What percentage of the total investment would you recommend as a maximum limit, for the employer stocks? 10%? 5%? Or even lower? And why?