How Much Company Stock is Too Much?

Add comment January 7th, 2008

  Theresa H. Harezlak, CFP® 

Imagine, you have more than 50% of your retirement savings in the company you work for and the stock price continues to appreciate, making you thousands of dollars per year. Now imagine you worked for Enron or World Com. There are some people who own a lot of company stock that become millionaires, many more of you, however, just become disappointed with your portfolios.   

The concern with owning too much company stock is two-fold—not only is your financial portfolio tied up in one industry and one company, but if you are also an active employee, your ability to earn a living is also tied up in that same company.  This situation can be less than ideal when the company experiences layoffs, management changes, or any other downfall in their performance.  You may be stuck out of a job and holding too much company stock that is declining daily. This scenario carries way too much risk.   

Your mother always told you to not put all your eggs in one basket.  The same holds true for owning company stock.   

My advice: if you like the company you work for and you think good things are happening, keep 5% of your portfolio in your company’s stock.  If you love the company and know that only good things are happening, keep up to 10% of your portfolio in that company’s stock.   

Remember, there is no shame or disloyalty to a company if you choose to own none of its stock.  Most advisors agree that no more than 10% of your portfolio should be in any one stock.  While, there is always a chance that a single company will outperform a diversified portfolio, history shows this is rarely the case and that possibility simply comes with too much risk.  

As with delicious food, a good wine, and so many other wonderful things in life, when it comes to owning company stock, moderation is the key to a good, healthy portfolio.