Don’t Put Too Much Stock in One Basket – Manage Exposure to Your Employer

e93a70a2e4ad670b0e17_f34f0fe33c5f42b67461_Elaine_Phipps.jpg
Elaine F. Phipps, MBA, CFA, Portfolio Manager, at Point View Wealth Management.
e93a70a2e4ad670b0e17_f34f0fe33c5f42b67461_Elaine_Phipps.jpg

When we think about all of the types of financial risk to try and minimize, we often overlook the peril of owning too much of our employer’s stock. We don’t realize how closely our investment portfolio ties to our cash flow if we are heavily invested in company stock.

We buy our employer’s stock for a multitude of reasons, but the most prevalent is our connection to the company. Becoming an owner ties us more closely to the fruits of our labor and makes us feel like more than a worker. In addition, companies often offer discounts to the market value when employees buy stock. These discounts typically range from 5-15%, which makes you feel like you are picking up a bargain.

What Could Go Wrong?

Sign Up for E-News

Your company’s paycheck provides life’s essentials – food, housing, education and leisure. Your company also likely provides other essential benefits such as healthcare and life insurance. Should you lose your job, you may need to rely on your savings and investments. If your company is struggling enough to have to reduce staff, its stock price is also likely suffering. Here comes the second whammy, a falling investment portfolio and 401K just when you need the cushion. Employees at Enron, Tyco, and Lehman learned this lesson the hard way as they saw their retirement savings wiped out at the same time they lost their jobs. In the Enron case alone, almost 58%, or $1 billion, of employees’ 401K assets were invested in Enron stock as it fell 98.8% during 2001.

How Much Stock Should I Own?

While there is no hard and fast number for the right allocation, investors are particularly vulnerable when the allocation exceeds 10-20% of their net worth. Step back and view how much exposure you would invest in any one stock that you don’t have personal experience with. That number is likely 2-5% of your portfolio.

Be sure to include direct holdings, options and restricted stock, employee stock plan purchases, company matches as well as pension fund holdings. In addition, take a look at mutual funds you hold for correlation as they may also have investments in your employer’s stock. Many investors didn’t know how exposed they were to technology in 2000 and financials in 2008 until both their personal and mutual fund holdings saw simultaneous double digit declines.

How Do I Reduce Holdings in an Efficient Way?

Once you know where you stand, begin the diversification process. Reduce holdings systematically and with discipline, and don’t try to time the market. Consider the tax consequences of any sales you make. Make sure you change your contribution rates for employee stock plans and your allocation in the 401K plan. Redirect funds to stocks and bonds not correlated, either through industry, geography or product line, to your company.

Know Restrictions for Buying and Selling

Blackout periods are common, often tying to the time period when earnings are about to be reported. These periods often freeze your account. The

risk is the blackout can coincide with the fall of the company’s stock as it did at Enron. That stock declined more than 35% during a pre-scheduled two week blackout.

Know Your Company’s Prospects Outside of Your Cubicle

You are invested in your company’s fortunes in many ways, both financial and emotional. Take control of your destiny by understanding your employer’s present position and future outlook. Read the annual reports (10- Ks), quarterly reports (10-Qs) and press releases. Study analyst reports and industry perspectives to understand how the company is positioned. This way you can make a reasonable estimate of what you think the short and long-term potential is for the company’s stock price. Don’t just listen to your employer’s opinion; make your own informed one. But, however informed your opinion is, don’t own so much employer stock that a missed forecast imperils you financially.

Note: Elaine Phipps, MBA, CFA, is a Portfolio Manager at Point View Wealth Management, Inc., a registered investment advisor at 382 Springfield Ave., Summit.

Point View Wealth Management, Inc. works with families providing customized portfolio management services and comprehensive financial planning, to develop and achieve their financial goals. We are independent and fee only.  How can we help you?  Contact David Dietze (ddietze@ptview.com), Claire Toth (ctoth@ptview.com), or Elaine Phipps (ephipps@ptview.com) or call (908) 598-1717 to learn how.

CNBC has named Point View to its list of the top 100 American fee-only wealth managers for both 2014 and 2015.The full-length version of this article is available at:  www.ptview.com.

The opinions expressed herein are the writer's alone, and do not reflect the opinions of TAPinto.net or anyone who works for TAPinto.net. TAPinto.net is not responsible for the accuracy of any of the information supplied by the writer.

TAP Into Another Town's News:

You May Also Be Interested In

Sign Up for E-News

Chatham

Mike Czech – One of Chatham’s Hidden Gems….

On a warm sunny day, back in 2008, at Southern Boulevard Elementary School stood a very tall man (6.5” to be exact!), soft-spoken, warm and friendly as he was surrounded by a whole group of children running around him (at his knees).

His name was Mike Czech and he was teaching the kids how to play a game on the open court.   I introduced myself to help assist him as a fellow ...

AtlantiCast

AtlantiCast: Episode 15

On this week’s AtlantiCast, learn some important tips for controlling and avoiding diabetes from an Atlantic Health System expert, see how Atlantic Health is advancing cutting-edge research, hear what’s being done to keep health care environmentally friendly and much more!

 

Chatham United Methodist Church Confirms 11

May 27, 2018

The Chatham United Methodist Church confirmed 11 young disciples on Sunday, May 20th. The youth spent a year-long journey studying the bible, the works of Methodist founder John Wesley, touring churches in NJ and PA to better understand their faith, volunteering for community missions, and writing prayers, selecting lectionary readings  and presenting the service to the ...