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| Investing in Company Stock: Caveat Emptor |
| 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. That's why investing in company stock can be very risky. |
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| If the company does poorly, for instance, you not only risk losing your retirement savings, but also your job. Investing in company stock also violates the cardinal principle of diversification–which is that you should never invest a significant portion of your retirement savings in a single stock. |
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| Instead, 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 (the degree to which the movements of two variables are related). If two assets are highly correlated, they will react the same way to changing market conditions. |
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| Most financial advisors recommend that you either hold no company stock in your portfolio or very little–usually less than 10%. If you decide to reduce your company stock holdings, you may want to do so gradually over time and avoid making any more contributions in the future. You should check with your account administrator or employer to determine whether that is allowed as some companies impose restrictions on how much company stock you can sell off per year. |
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| Although you should limit the amount of company stock in your portfolio, you should continue to accept any contribution matches your company offers in the form of company stock. These contributions are tantamount to receiving "free" money. |
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