I went to lunch with a couple former coworkers the other day and we discussed the current issues at my former company.
I never mentioned it when I was looking for a new job, but my former company was having financial difficulties. Those problems have recently intensified, and in the last 12 months the company’s stock has dropped over 75%. That is an extreme amount and it is putting the future of the company in doubt.
I am happy I am no longer employed by them, but I am not happy for the situation some of my friends and former coworkers are in.
Through the years, there have been a lot of people who assume they should buy as much stock in their company as possible. Buying stocks can be an excellent investment, and what’s wrong with purchasing stock in the company you work for?
Don’t put all your eggs in one basket!
One of the things I try to do with my investment portfolio is diversify my holdings among several different investments. I primarily invest in index funds because they have the lowest fees and generally cover a wide range of options. One thing I stay away from is investing in my company’s stock.
It’s not hard to find examples of people who lost their life’s savings after investing heavily in their company – only to watch it go belly up. Prime examples include Enron, WorldCom, and dozens of DOTcom’s that had inflated prices before the world realized they were only speculations and the bottom fell out.
Another reason is that your job is probably your main source of income, so it already represents a huge portion of your total income producing assets (remember, you can consider your ability to create income as an asset).
In high school my Dad told me the reason he didn’t invest in his company stock was that if the company was doing well, chances are he would have a job that would be going well.
He chose instead to invest in index funds and similar holdings which has done well for him.
What about company matching?
Sometimes companies give matching 401(k) funds as stock, or they fund pensions with company stock. If that is your only choice, then you should probably take it. After all, it is free money, right? But you should be careful that the amount of company stock you own doesn’t become too heavily weighted based on your total portfolio. You might look into selling some of it when possible to maintain a balanced portfolio – just beware of possible tax implications.
What about company discounts?
Some companies offer Employee Stock Purchase Plans that allow their employees to buy stocks at a discount. Sometimes this can be a good deal. If you know your company and think it is well valued (and you aren’t trading on insider information), then making a stock purchase can be a good thing. Just remember not to own too much company stock relative to your total holdings.
However, you should only buy your company’s stock based on its intrinsic value and not only because you are getting a discount. After all, a 10% discount on something that is over-valued means you might be breaking even at best, or at worst losing money.
Owning company stock isn’t bad – it’s all about balance!
Just like everything else, balance is the key. Your career is already heavily invested in your company, so focus your other investments in places that will give you the best return. The last thing you would want to happen to your company is another Enron type situation.
Your investments are the fuel behind your retirement savings. If something awful were to happen, like your business going under or those stocks plummeting, you would be left with nothing but some useless stocks. Now, if your portfolio is properly diversified, your retirement accounts won’t be completely wrecked.
Looking for an easy way to diversify?
As I mentioned, you don’t want to put all of your eggs in one basket, but where should you put the rest of your eggs? There are tons of options where you can invest your money. Every person is different, and each of them has different financial goals and risk preferences.
If you want an easy way to mix up where your eggs are (diversify your portfolio), the Internet has made it quick and simple. In fact, you won’t even have to do the investing.
Sites like Betterment allow you to start investing your money without having to spend hours and hours researching stocks, bonds, and mutual funds. With Betterment, all you have to do is create an account, answer some questions about your finances and goals, then sit back and watch your money grow. Betterment will even reinvest your money as you earn dividends and you continue to make contributions.
Another easy way you can diversify your money is to put some money is to invest in peer-to-peer loans. P2P loans have become one of the most popular investment options for those looking to get away from the stock market.
The idea of P2P loans is not new, but there are several websites which have made it quicker and more profitable for investors. There are plenty of different sites you can use, but all of them will help you connect with borrowers who you can buy “shares” of their loan.
Another quick way you can diversify your portfolio is to put some money in a REIT.
These are basically mutual funds which specialize in large-scale real estate investments. If you’ve been wanting to get in real estate, without having to manage all of the properties and do the day-to-day landlord duties, REIT are an excellent alternative. There are several kinds of REITs you can invest in, retail, commercial, residential, and healthcare.
Historically, REITs have had excellent returns, and they are an excellent choice if you’re looking for another avenue to invest your money.
Regardless of how you decide to diversify your investment portfolio, it’s essential you have your money in several different avenues. Having too much money in company stock could leave you in a similar situation to my friends.