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Owning your company’s stock can be a financially rewarding way of participating in its success. It feels great to know that you’re not just an employee, but an owner of a small piece of the business.
But there can also be downsides to owning too much of your company’s stock. Whether you’ve acquired shares through an employee stock purchase plan, your 401(k) plan or some type of stock-based compensation, it’s important to think through just how much of your capital should be coming from your employer.
Some experts say you should actively reduce your holdings once they exceed 10% of your net worth. But this is a complex issue that really boils down to a few factors: your predictions about your company’s future, your planned retirement date, and your total wealth.
Let’s look more deeply at these three factors.
1. Be objective about your company’s future
You’re inherently biased, positively or negatively, about your company’s prospects. Most of the time, I find people are too optimistic about their employer’s future. Surely your company is going to outperform its competitors; after all, you work there, right?
If your company is well-positioned in a stable industry, you’ll be able to hold a larger percentage its stock in your portfolio. You might be more conservative in your allocation if your company is in a very competitive industry or its stock is volatile.
You can get a sense of how volatile your company’s share price is relative to the share prices of other companies by researching what’s called your stock’s beta. Many financial websites have this information. A beta of greater than one means your stock is more volatile; a beta of less than one means it’s less volatile.
2. Calculate your retirement date
Your planned retirement date is another key factor in the amount of company stock you should hold, especially if you’ve already determined that it’s volatile. If you’re less than 10 years away from retirement, consider decreasing your holdings below 10% of your net worth. If you have 20 years or longer until retirement, you can hold a larger position.
3. Consider your total wealth
Most of us go to work to earn a salary and receive benefits, such as insurance and access to a retirement plan. These benefits may be your biggest financial asset. When you add company stock to that mix — perhaps as part of your 401(k) — quite a bit of your financial life can depend on one source.
When deciding how much of your company’s stock to own, consider how secure you feel in your position and how much you and your family depend on your salary, benefits and stock. For example, if you’re the breadwinner, you’re particularly vulnerable if your company struggles. The stock could decline in value, jeopardizing your retirement, and you could lose your job. In that case, you might want to be conservative about how much company stock you hold. On the other hand, if you and your spouse both work, you might be able to hold more.
The bottom line
Owning your company’s stock is a great way to build your net worth and feel better about going to work each day. Keeping these basic rules in mind can help you benefit from your company’s stock without the financial stresses that could come along with it.
This article appears on Nasdaq.
Image via iStock.