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Why Too Much Love for Your Company Can Be Disastrous for Your Finances

If I were asked to give you the 10 commandments in financial planning, “Don’t buy too much of your company stock” would be right up there.

Nearly a decade after the collapse of Enron Corporation in the US, many employees still haven’t learned one of that episode’s clearest lessons: Don’t bet your nest egg on the place you work.

Enron employees certainly learned the hard way: Nearly two-thirds of their retirement money was invested in the company’s shares, which became worthless. Imagine yourself in their situation and seeing your stocks drop by 99% in a flash of a moment.

But Enron didn’t teach employees a lesson. Worldcom and Lehman Brothers workers suffered the same fate. They also saw their retirement dreams disappear along with their jobs.

In India, employees of Satyam Computers who bet their retirement money on their company’s stock faced the same issue. Everything disappeared before their eyes! From a high of Rs 526 in May 2008, the stock dropped to a low of Rs 11.5 on 9th January 2009, or a fall of 98%!

While the stock has recovered from its lows, old employees will probably have to wait their lifetimes to get their capital back. And even then there’s no guarantee it will ever come back.

See, your company might not be the next Enron or Satyam (pray not!), but the key lesson that emerges from such episodes is this…

Even if you think you work for the greatest company in the world, investing heavily in its shares is not wise.

The ‘golden’ egg in your basket
You would have heard this before that you must never put all your eggs in one basket when it comes to investing money.

But are you aware of the golden egg that lies in your basket?

It’s YOU, dear investor.

You already have your most important asset – you – invested in your company.

Putting other valuable eggs – your retirement savings – in the same place is just too risky.

When you do this – put your skills and retirement savings in the same basket – you’re playing a game of double jeopardy, where you confuse the familiar with the safe. Like all those poor souls at Satyam who thought their company was the best one around because they ‘knew’ it inside-out.

But such thinking can be hazardous to your financial health.

Allowing one stock – your company’s stock – to represent a large portion of your portfolio is risky. This is because it ties your savings to the performance of the company that also pays your salary.

Of course, investing heavily in company stock may seem like a good thing when your company and its stock are doing well.

But many companies experience fluctuations in both operational performance and their stock prices. Not only do you expose yourself to the risk that the stock market as a whole could stumble, but you take a big risk that your company will weaken or fail.

Your financial future is at stake
When you own your company stock, you are in effect sharing in its financial success. But always remember that this also carries the risk that your company’s financial problems will become your ‘personal’ financial problems.

“So how much should I invest in my company stock?” you may wonder.

If you believe (not ‘think’, but ‘believe’) your company is going to do very well over the next few years, and if the stock is available at reasonable valuations, then put 5% of your investments in it.

Buy more if you remain positive on the company’s business prospects even while the stock becomes cheaper in a market crash like this one – but not more than 10% of your total financial investments.

And if your company gives you some bonus shares when it is doing well and in appreciation of your work, sell them as soon as possible to keep below the 10% level.

What’s the right number for you – 5% or 10%?

In determining this, remember that your financial future is just that – yours! So invest in your company stock accordingly.

All in all, love your company, but keep your eyes and ears open.

Your boss might not love you when you do the latter – keep your eyes and ears open – but then it’s your financial future that is at stake, not his.

By the way, how much of your financial savings is invested in your company’s stock (or ESOPs)? Share with us in the comments below or post it on our Facebook page.

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About the Author

Vishal Khandelwal is the founder of Safal Niveshak. He works with small investors to help them become smart and independent in their stock market investing decisions. He is a SEBI registered Research Analyst. Connect with Vishal on Twitter.

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