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I started a new job and have the option of buying company stock, up to 8% of my salary, at a 10% discount. Is this a good investment, or should I stick to my 401(k)? With the Enron fiasco, I’m wary.
-L. Harris, Chicago
Call me cynical (you wouldn’t be the first), but the phrase “loyal to a fault” came about for a reason. Your instincts are right because Enron showed us all the dangers of relying on one company to provide both a paycheck and a retirement nest egg.
But investing in your company shouldn’t be an all-or-nothing proposition. Employee stock purchase plans are a means by which employees, because of their discount, can benefit more substantially from any upside in the stock. But that potential upside must still be balanced by proper diversification.
So, how much company stock is too much? That depends on the nature of the company. If you work for a biotech startup, that’s very different than working for General Electric. If asked for a broad rule, I’d start with a cap of 10% and move lower as you assess the value of your company as an investment. Even though you’re an insider, you should analyze the stock as you would any other. Are you in an industry that’s particularly volatile or subject to possible regulatory changes? Do you have faith in management?
So sure, be loyal to your employer, and take pride in where you work-but remember that loyalty doesn’t have to be expressed in financial terms.