3 Reasons You Shouldn’t Hold Any Stock in Your Own Company

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3 Reasons You Shouldn’t Hold Any Stock In Your Own Company

How To Invest Your Money

If you work for a large U.S. company, chances are they offer a 401(k) plan with one of the investment options being company stock. The vast majority of employees end up selecting company stock as one of their investment options, often relying on company stock to make up a substantial amount of their total funding. This reliance on company stock can be a mistake. Here are three reasons why you actually shouldn’t hold any stock at all in your own company:

Layering of Risk

This is a factor many employees don’t think about, but remember that the company is already paying your salary, probably benefits and possibly even stock options or restricted stock units as part of a long-term incentive program. If this is the case, why add even more risk to your personal income by investing in the stock? Chances are that if the company is in decline, the risk of a layoff will increase. This would coincide with a decline in the stock price, which would also hurt your 401(k). Why not avoid the stock altogether so only one negative event can affect you at a time?

Diversification Is Better

If your aim is to diversify, owning individual stocks is never as good as owning broad baskets of multiple stocks — which you can find in most mutual funds that company plans offer. Statistically, your company is no more likely to beat the market than any other individual stock. If the company had such great prospects, the efficient-market hypothesis dictates that these prospects would already be priced into the current stock price anyway. So rather than taking on the risk of single-stock exposure, just buy a broad-based mutual fund instead.

You’re Emotionally Attached

One tendency of company employees is to be irrationally emotional and enthusiastic about the prospects for their own company. I’ve been guilty of this myself. When an executive gives a presentation about all the new products we’re about to launch and what our market projections are for the next year, I get pretty excited about my company’s prospects. But after living through this same cycle year after year and seeing the stock price remain relatively flat, I’ve come to realize that the stock is only as exciting as the market treats it. Aside from the fact that employees often have a higher opinion of their company’s prospects than the price that company fetches in the stock market, they’re also less willing to sell when things head south. Many Enron employees, for instance, held their shares until the very end when the company entirely imploded. People want to believe that their company will prevail.

 

The information in this article is provided for education and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness or fitness for any particular purpose. The information in this article is not intended to be and does not constitute financial or any other advice. The information in this article is general in nature and is not specific to you the user or anyone else.

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Darwin is an engineer and MBA who takes an "evolutionary" approach to finance, writing about adapting to evolving financial management, tax, investing and savings opportunities. Making more money and saving more money is an adaptive process - join the evolution! He blogs at Darwin's Money and ETF Base. Follow him on Twitter @ Everyday Finance.

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