New Here? Get the Free Newsletter

Oblivious Investor offers a free newsletter providing tips on low-maintenance investing, tax planning, and retirement planning. Join over 21,000 email subscribers:

Articles are published Monday and Friday. You can unsubscribe at any time.

How Much Employer Stock is Too Much?

A reader writes in, asking:

“How much employer stock does it typically make sense to hold in one’s portfolio?”

From a financial planning standpoint, the ideal amount of employer stock to own is “as little as possible.” If anything, an argument can be made for having a negative allocation to employer stock (e.g., by using various options strategies that benefit if the stock goes down).

It’s true that many people have become mega-millionaires through ownership of employer stock (see: Microsoft). But many people have also experienced financial ruin through ownership of employer stock (see: Enron).

Owning individual stocks (as opposed to diversified mutual funds) is generally undesirable because it results in “diversifiable risk,” which is risk that is not, on average, compensated with additional return. (See this article for more on that topic.)

Owning the stock of your employer is, on average, even worse, because it causes your employment and your portfolio to be exposed to the same set of risks. Getting laid off is a bad financial scenario. Getting laid off at the exact same time that your portfolio tanks can be a catastrophic financial scenario — definitely the sort of thing that it makes sense to go out of your way to avoid, if possible.

That said, there are some cases in which it is more or less unavoidable to have a portion of your portfolio allocated to the stock of your employer. For instance, some employees are compensated with “restricted stock” that they cannot sell until certain conditions have been met (e.g., the employee has held the stock for a certain number of years). Alternatively, some employees are allowed to use a portion of their income to purchase employer stock at a significant discount, but they aren’t allowed to sell it within a certain number of months.

If employer stock is a part of your compensation, there’s no sense in turning down free money. But as soon as you can sell such stock, it generally makes sense to do so.

 

New to Investing? See My Related Book:

Book6FrontCoverTiltedBlue

Investing Made Simple: Investing in Index Funds Explained in 100 Pages or Less

Topics Covered in the Book:
  • Asset Allocation: Why it's so important, and how to determine your own,
  • How to to pick winning mutual funds,
  • Roth IRA vs. traditional IRA vs. 401(k),
  • Click here to see the full list.

A Testimonial:

"A wonderful book that tells its readers, with simple logical explanations, our Boglehead Philosophy for successful investing." - Taylor Larimore, author of The Bogleheads' Guide to Investing
Disclaimer: By using this site, you explicitly agree to its Terms of Use and agree not to hold Simple Subjects, LLC or any of its members liable in any way for damages arising from decisions you make based on the information made available on this site. I am not a financial or investment advisor, and the information on this site is for informational and entertainment purposes only and does not constitute financial advice.

Copyright 2020 Simple Subjects, LLC - All rights reserved. To be clear: This means that, aside from small quotations, the material on this site may not be republished elsewhere without my express permission. Terms of Use and Privacy Policy

My new Social Security calculator (beta): Open Social Security