My friend was recently was hired for a new job and e-mailed me asking for some clarification about his company’s retirement plan and stock options. He copy and pasted
this bit of his company’s retirement plan in to the e-mail:
“(Company name) sponsors an Employee Stock Purchase Plan whereby all employees are eligible to purchase shares of (company name’s) stock (traded under ticker symbol “(removed”) at a 15% discount off the market price at the end of each calendar quarter. Employee elections, of up to 10% of base salary, are required before the first day of the calendar quarter and are binding for the entire quarter. Employee contributions during the quarter are used to purchase shares at the close of the quarter at 85% of the market price at the time of purchase. Shares are deposited into a personal account with E*Trade Financial on behalf of the employee. All shares purchased through the program must be held for a period of at least six months.”
My friend believes in the world of simple investing through index funds and was wondering if his company’s stock should have a place in his portfolio. I replied that he shouldn’t and let’s look at why I think it’s smart to avoid investing in your company’s stock.
Too Risky
Investing in your company’s stock is a risk. You already have your employment invested in them so if they go under your paycheck and employment is going to go as well. As we’ve seen over the past 2 years, the stability of any job is questionable in a bad economy so going a step further and investing for retirement with a company’s stock isn’t a smart move for negating risk.
Now, my friend’s company makes the offer enticing by offering a 15% discount for the stock. Could this mean they’re desperate for stock holders, or that they’re just being considerate to their employees? It’s arguable, but it’s never a good idea to buy something you’re kind of interested in just because it’s on sale.
See What the Future Holds
15% is a significant discount and one that I suggested could be considered down the road by my friend. Right now, he shouldn’t make the bulk of his retirement savings his company’s stock. He just started the job and doesn’t even know anything about the company so it wouldn’t be a smart move. I suggested my friend keep the offer in the back of his mind. Maybe when he gets some time under his belt at the company, builds up cash savings in an online savings account, and starts investing for retirement in an index fund that he could consider investing some money in his company’s stock.
Warren Buffet once said, “If you don’t feel comfortable owning something for 10 years, then don’t own it for 10 minutes.” My friend doesn’t know much about his future or the company’s so it’s hard to feel comfortable buying stock from them. For the time being, it’s best to avoid his company’s stock and instead take the the easy route of investing with index funds in a Roth IRA.
No One’s Too Safe
Need more reason to avoid your company’s stock? Ask the ex-employees of Enron who had the majority of their retirement savings invested in Enron stock. In all, the workers lost $2 billion in pensions and and share accounts when Enron went under in 2001. They were told their company’s stock was a safe investment and in the end they lost not only their jobs, but their future savings.
So, in conclusion it’s probably not the best idea for your financial future to invest money in your company’s stock. There’s too many unknowns to fully trust putting your money in their company – even with a sizable discount.
What do you think? Should my friend avoid his company’s stock or invest away? Do you invest in your company’s stock?
Photo: Helico
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I invest in my company stock because it’s matched $1 for $1 up to 6%. This automatic return makes it very attractive. In addition, the contributions are pre tax so it lowers your adjusted gross income.
For those two reasons, it makes sense for me to invest in my company stock. In your friends case, it still makes sense because of the discount he is getting on the company stock price, giving him a return right off the bat.
If the company is listed on the stock exchange, it’s publicly traded and it will have its annual report available to the public. By reading the financial statements and letter from the accounting firm that audited the reports, you can get a good idea of the financial health of the company and thus make your decision to invest in the company stock.
Lastly, a lot of companies have other investment options besides the company stock, so it may still be worthwhile to contribute.
Lastly, Enron was an isolated incident. I am not saying it can never happen again, but both the executives and the company’s accountant, Arthur Andersen was in cahoots on the whole fraud. So, it was a pretty elaborate fraud.
Doing your own research is definitely key to investing in your own company stock.
[Reply]
Austin Reply:
July 11th, 2010 at 10:37 pm
That’s a very nice match from your company.
My friend’s issue is that he doesn’t want to do the research and doesn’t believe in individual stocks so for him, I think it’s best to avoid for now.
Thanks for the comment, Mike.
[Reply]