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Over 10% of Your Nest Egg in Company Stock? Bad Idea

Periodically I interact with individuals who choose to bet the farm and place a majority of their retirement funds in their employer’s stock. The individual usually has a very high conviction towards their company, but the problem is that there are not enough good reasons to justify doing this. Here are my top ten reasons why you should NOT have over 10% of your nest egg wrapped up in employer stock:

10) Increased Life Insurance Need: What if you bought life insurance and didn’t consider that the stock could tank and you suddenly pass away. Isn’t your family at financial risk if this is the case? And if you did consider it, there is the additional cost of paying for a higher amount or for the longer term so you can take this risk.

9) “Even the best companies will drop 50% every 20-30 years” – Warren Buffett. What if this drop happens right in your initial retirement years, selling at lows to cover cash flow needs? This is devastating to a retirement portfolio, increasing the probability of running out of money during your lifetime.

8) Being an Insider may not protect you. I often get responses such as, “I know better since I’m an insider.” There is absolutely no competitive advantage to being an insider. Just ask the former employees at Enron that one.

7) Ever drive without your seat belt on? This and placing a high amount of your retirement funds in the company stock are both great examples of uncompensated risk. It doesn’t take that much time or effort to diversify or put your seat belt on and the consequences of not doing this can be fatal. In the end, dedicating high amounts to your company stock is not investing, it’s speculation; and there is a big difference between the two. And if you come up on top, it was more luck than it was skill.

6.) The 80% Rule: Eighty percent of those who become rich due to a concentrated holding lose it because they fail to diversify.

5.) You can still do awfully well with a small stake: What if you are employed at the next Microsoft? You can still do extremely well with it a small portion of the stock in your overall portfolio.

4.) You not only have investment risk, but employment risk: People fail to take into account that they have financial risk with being employed by the firm as well. If the company does great, not only will the stock benefit, but won’t you benefit in the form of higher compensation, bonuses and commissions? What if the stock tanks? You probably have severely altered your retirement plans, but you may also be out of a job.

3.) Adephia, Enron, Worldcom & Delphi; How sure are you that your company will be different? Bethlehem Steel was once a component of the Dow Jones Industrial Average; it doesn’t exist anymore. Often people will have employer stock of a company that isn’t publicly traded and cite this as a reason that they won’t fall in the same trap. Former partners at the accounting firm Arthur Andersen can tell you that this does not protect you.

2.) What if the stock tanks during your pre-retirement years? If this is the case, it can have a domino effect. You would have to stash more away for retirement or worse, alter your retirement plans altogether. This may affect your college funding plans or force you to sell the vacation home you had. And as mentioned above, it may even cause you to lose your job. Is it worth it?

1.) If you lose it all, your spouse is never going to let you hear the end of this: A little more lighthearted here, but true. And although there is no financial cost here, the emotional grief over time isn’t worth it.

Do you have over 10% of your nest egg in company stock? If you do and if you are not restricted in any way or form to sell it, you better have 10 compelling reasons why you are doing this. I challenge you to try to come up with 10 good reasons to hold; I bet it going to take some time or a stretch to accomplish this.

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