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Company Stock: Keep it or Ditch it?
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It may seem like a good idea to hitch your retirement fortunes to the performance of your company's stock. After all, the stock price keeps climbing and climbing, senior management has an impressive game plan to grow the business, and the company appears to have a rock-solid financial foundation.
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The problem, though, is that even the fortunes of the most admired companies in corporate America can quickly sour. This was brought into sharp focus over the past few years when some well-known companies in the financial services sector collapsed under the weight of the credit crisis.
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The employees of these companies who may have had a significant portion of their retirement savings invested in company stock now face a bleak retirement future or a tough uphill battle to rebuild their nest eggs. Not only that, many also lost their jobs when their companies went under. Most investment experts agree that it's never a good idea to invest your retirement savings in company stock. Part of the problem is that your source of income and your retirement savings are too closely correlated. The more significant problem, though, is that your portfolio is poorly diversified. And that can be extremely risky.
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It generally isn't enough to diversify your retirement holdings by simply investing in a variety of companies in different industries. What you should be doing is investing across asset classes (such as cash, bonds, commodities, real estate, and stocks), investment styles (value, blend, and growth stocks and funds), and global regions. The objective is to design a retirement portfolio in which you place your savings in different buckets of investments that aren't highly correlated. That way, if something happens in the US markets that sends stocks tumbling, only a portion of your retirement nest egg will be affected. Over time this ensures smoother and more consistent returns.
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If you currently have company stock in your retirement account, you may want to consider gradually reducing your holdings in that stock. You also should reduce or eliminate any future allocations to company stock in your retirement plan.
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