The number one rule of investing is that you should always know WHAT you own, and WHY you own it. Simple as it may sound, each and every investment in your portfolio should have a specific purpose. That goes for any stock you have through your current or former employers, as well. Yet often, people tend to think of employer-based stock differently (because it’s a form of compensation), and as a result, can end up over-exposed to portfolio concentration and risk.
I’m frequently asked, “what percent of your portfolio is allowable in terms of stock-based compensation?” While that’s a good question to ask, I think it’s easier to think about it this way: If you were going to construct a portfolio from scratch, would you own this much of this one company? For most people, the answer is probably not.
Here are 4 reasons why having your portfolio overly concentrated in company stock can be a challenge:
Work-related stress also becomes financial stress. Work can be stressful; it’s just par for the course. But the day to day stresses of work become hugely magnified if the success of your portfolio is single-handedly driven by the success of your company. After all, if the worst were to happen and your company suffered financially, that could result not only in your losing your job, but also in simultaneously losing a good chunk of your wealth.
Don’t take any single risk that would ruin investment results for the entire year. One of the main themes I learned as an institutional investor managing large, multi-billion dollar portfolios was that when balancing risk, it’s generally best not to make any single investment so large that if it went south it would ruin your investment results for the entire year.
The same holds true for personal investors. Oddly enough, many people tend to discount the effects of large amounts of company stock on their portfolio results. But it’s important that your financial investment in your company doesn’t outpace what you’d put in place if it was any other company.
You have limited market agility. If you work for a public company, you likely already know that around the time when earnings are reported or if there is material news about a company that has yet to become public, there is a blackout period when you can’t trade company stock. What people don’t always consider is that these limitations are in place regardless of what’s going on in the stock market or economy as a whole.
Meaning, if you started to see the onset of a recession or market downturn (which isn’t specific to your firm but does affect stock pricing) that happened to coincide with these blackout periods, you’d still be subject to those restrictions. As a result, your ability to be agile and adapt your portfolio to market conditions is somewhat limited.
It’s hard to be dispassionate about something you’re so close to. The best investors make investment decisions based on data rather than emotion. Yet it’s quite difficult to make a decision about your company stock without bringing emotion into the fold. And that decision becomes even more difficult if that stock makes up a considerable portion of your portfolio.
While you’ll likely know more about the company and its likelihood to succeed than an average investor, it’s just as important to understand industry-wide factors (like anti-trust regulations or new privacy regulations) and overall market dynamics.
The reality is that having company stock is, generally, a good thing. It shows that your company believes in what you’re doing and wants you to be financially (and emotionally) invested in the company’s success. But as with most things in life, too much of a good thing isn’t all that good. That’s why your goal should be to earn (not own) as much employer stock as you can.
While too much company stock often falls in the bucket of “good problems to have,” it can still be a problem nonetheless. Curious as to whether your portfolio is overly concentrated with company stock? Contact Paceline today for a free 15-min consultation.
This blog was written by Jeremy Bohne, Principal & Founder of Paceline Wealth Management. Paceline is a fee-only investment advisor serving clients in the Boston area, and on a remote basis throughout the country. Paceline specializes in helping tech and biotech executives, physicians, and those seeking financial planning services.