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?

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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.