How much of your employer’s company stock should you consider in your 401(k) account?
Should an employee hold company stock in their 401(k)? A common mistake many employees of large companies make is holding too much of their retirement savings in their company’s stock. While it can be rewarding to own a piece of a respected company or some large employer, it may be risky from a retirement planning perspective.
The short answer for employees when asking how much company stock they should own is “It depends.”
PROS: WHY YOU MIGHT WANT TO OWN COMPANY STOCK in YOUR 401(K)
Most participants in any 401(k) plan will hold large cap stock mutual funds of some sort. While holding your company’s stock reduces the diversification of owning a mutual fund of several similar companies, owning some of your company stock exposes account holders to one of the most common and well-liked-by-financial advisors company’s in the world. In a sense, while holding a single company stock CAN increase risk, it can also increase exposure to potential reward if the individual makes and educated decision.
CONS: WHY YOU SHOULDN’T OWN TOO MUCH COMPANY STOCK
Most people remember the lessons learned in the late nineties from holding too much of their employer company’s stock: read “Enron.” While holding any single stock COULD hold the risk of similar results, one truly needs to take the decision on a case by case basis.
Take AT&T for example. Some analysts would consider AT&T a much stronger company than Enron, thus the concept of holding AT&T stock might be considered less risky. However, being over weighted in any single stock can have its down side if that ONE company should face a downturn.
In short, even large companies, with long track records, can see a decline in stock value for a variety of reasons. Holding too much of any one company stock could expose an individual to too much risk.
WHAT YOU SHOULD DO
Avoid chasing performance. Many individuals choose their 401(k) options based on performance alone, but performance can be misleading. What did great last quarter could underperform the next.
Get an outside opinion. Paying a small hourly fee to a qualified financial advisor to review your investment choices based on your own risk tolerance could be a great investment.
Take a look at your 401(k) regularly. While “set it and forget it” can work for accumulation, once you have a nest egg built up in the 401(k) research shows it is helpful to review your account at least annually.
Conrad Slate, Rick Disharoon, and Will Parrish are Representatives with Cambridge Investment Research and may be reached at (865) 357-7370, by email or www.sdp-planning.com.
Email us at…
Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Slate, Disharoon, Parrish and Associates LLC are not affiliated.