I thank my fortune for it, my ventures are not in one bottom trusted, Nor to one place; nor is my whole estate Upon the fortune of this present year - The Merchant of Venice
So What's the optimum amount of stock to own in the company you work for?
Zero.
That's right. No shares. Nothing. Zilch. The answer doesn't change if you work for Amazon, Enron, or Chevron. Unless you own equity in a small company, the absolute best level of investment ownership in the company you work for is zero, regardless of that company's performance.
Well aren't you a regular Benedict Arnold?
Let me be clear. I am not indicting your or my company's stock performance. I rather like the company I work for, and I think we've got amazing future potential. Furthermore, I feel like I owe quite a bit to my company for all the opportunities I've received. But none of that changes the fact that objectively, mathematically, investing any incremental amount of money in the company you work for is unnecessary exposure to diversifiable risk.
Think about it. A sizable portion of your livelihood is already tied to your company in the form of a steady paycheck. Do you really want to double down on the dependence to your company by investing any of your life savings into that same company?
Let's assume for a moment that your company is going through a rough time. The stock price has plummeted from it's recent record highs to an abysmal level... perhaps 50% of it's original value. Your 401(k) is in shambles because you never bothered to reallocate the company's contribution match that comes in the form of company shares.
That's when the real pain begins. Your boss calls everyone into his office and announces there will be layoffs. Will you be one of the unlucky ones to be let go after the beating your life savings just took?
This sounds like an extreme case. But it's actually a familiar story for millions of people at some point in their careers. Remember Enron? How about Compaq? Kodak? Radio Shack? And these are just a few examples of companies that have completely failed. The list of Fortune 500 companies that have languished in stock market mediocrity and gone through recurring cycles of downsizing, divestitures, and defensive layoffs is too long to list. And yes, this list of companies is much longer than the list of Microsoft millionaires.
But allow me to take a moment to digress. Perhaps you feel a personal sense of ownership and solidarity by owning stock in the large company you work for. If this provides some form of value to you, by all means you should invest in the company you work for. My only plea is that you limit your investment to an amount you would be willing to lose altogether, should the fecal matter hit the oscillating rotator.
But Doesn't Employee Ownership Result in Better Business Results?
Let's get real. Joe Flenderson, senior accountant extraordinaire, is probably not going to make an individual decision to stay one an extra hour to proof-read next week's profitability report simply because he thinks doing so will result in the company's stock (of which he owns 0.0001%) to climb. He may have plenty of other reasonable incentives to work long hours, but his personal share of company stock is realistically not top of mind.
This might be different if the company were much smaller and Joe owned a more sizable share of the company. But for most Fortune 500 companies, the link between company performance and an Employee Stock Ownership Plan (ESOP) isn't clear. Research has shown it takes much more than an ESOP for an employee to feel ownership for the outcomes of his company.
The other exception is if you are a c-level executive with millions of dollars worth of incentive stock options (ISOs) and in a position to directly impact the future of your company. But I'd wager you'd prefer cash instead of stock options anyways. If this is you, welcome to my blog! I'm a young, talented, dashing future leader with "potential middle-manager" written all over me!
What About Options for Non-Executives?
Options are a great way for companies to reward employees for performing well in the past. For reasons mentioned previously, they aren't really used as incentives to perform well in the future by way of directly impacting the stock price. For most employees, options should be exercised as soon as they are within the exercise window, depending on how far the current stock price has appreciated above the grant (or exercise) price. Exercising the option earlier will allow you to cash out of the additional exposure to your company and diversify among other assets. Tax situations may also impact the correct decision here, so it might be a good idea to consult a tax professional.
Wrapping Up
So consider selling all or at least some of your company's stock. The additional diversifiable risk is not worth the expected return. Diversify your assets across multiple companies and classes through low-fee index funds. Hopefully these are available in your company's 401(k) plan.
New to investing? Consider signing up for my next investing class in St. Louis. Over 90% of students, whether brand new to investing or more skilled hobbyists, have taken some sort of action with their investment accounts after attending my class. Register here!
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