How much should I invest in stock from my company?
Have you ever worked at a job that gave you access to more of something than you could ever want?
You might be a pizza lover, but let me assure you from my own experience that a few weeks of full time work at a pizza shop will lessen that craving quite a bit. The same feeling can be had with any profession you may love from the outside, but find that having access to too much of whatever it is lessens the allure.
I imagine that this feeling can be the same with executives of corporations, though they tend to not only have a great job and perks in their businesses, but also have access to company stock in ways the average employee does not.
When I look at how successful executives invest in their own companies – these individuals that have stock options, stock grants, restricted stock, and a myriad of other plans that incentivize them to be owners and have a stake in the company’s success – it can be somewhat surprising to watch their behavior towards owning stock and how it can be different than the average employee.
They own stock (and often times lots of it), but perhaps it’s similar to having ‘too much’ of something that makes you appreciate what ‘it’ is in different ways.
I find executives who own stock in the many ways they do often exhibit the opposite behavior of regular employees when it comes to holding stock in the company they work for.
Regular employees often:
Hold too much of their company stock as a percent of their investments,
Have a tendency to think the stock will do better than other similar companies,
Hold onto it based on emotion both during goods times and bad, and
Generally want more rather than less.
While it’s true many executives have minimum stock ownership requirements that can result in their holding a substantial amount of company stock, they don’t often go out of their way to buy substantial amounts, or gamble on where the stock may or may not go. Many look for opportunities to sell and diversify their holdings. The first move many make at retirement is to sell stock they previously were restricted from doing so and creating a diversified portfolio. \
We want to feel like the stock of company that provides us with an income and our benefits will do well, but attaching those feelings to any stock can be aHUGE investing mistake! Investors who do this carry significant risk, as not only is their income and company benefits based on the company, but so is the success of their investment plans!
Executives that already have more company stock also seem to appreciate diversification over many companies other than just their own. While we often think we have great knowledge about how a new product will impact a company’s stock performance, business leaders that have been around know it’s not what they think they know that will determine the stock price, but it is what they don’t know about the event that can drive the stock price up or down.
If you are an investor in stock of the company who employs you, think as if you are investing like those that are successful and diversifying your risks, or if you have a tendency to invest in your company based on emotion.
A rule of thumb to invest by: Never allow any investment to be more than 10% of your total portfolio.
The preceding blog was originally published by the Financial Planning Association®(FPA®). To view the original blog please visit the FPA Web site.