Every day there are stories of startups paying employees in company stock. Many employees in established public companies also have the option to invest in the company’s stock either in their 401K plan or to buy shares on the open market. While conventional wisdom may be to invest in what you know, investing heavily in the company you work for is not a great idea.
But why you ask? Isn’t getting paid in stock a great way to get rich? Yes, you’re correct that if you get in early at a great start up like Facebook, then maybe you can strike it rich, but for every person that does land at Facebook, there are thousands, if not millions of people that don’t. And it’s for that reason that you need to be prepared.
Great investors diversify and investing in the company for work for is not diversification. Think about it, who pays your salary? Your company. Who pays for your benefits? Probably your company. Starting to see the picture? Investing in the company you work for is just doubling down on your dependency to them.
[perfectpullquote align=”full” cite=”” link=”” color=”” class=”pullquote-green” size=””]Great investors diversify and investing in the company for work for is not diversification.[/perfectpullquote]
If you have a majority of your retirement or savings invested in company stock and the company goes bankrupt, not only do you lose your job you lose your savings and retirement as well. If you think the chances of this are slim, just ask the employees of Enron. Think Enron was a one-time disaster and companies don’t go bankrupt that often? Well, sorry to be the barer of bad news, but there have already been 9 retailers that have closed this year, and there is probably more on the way. Now, I’m not trying to be a Debbie Downer, I’m just being realistic. All companies don’t stay in business forever, so linking all your finances to one is a bad idea.
While you can probably find a new job quickly, it is very difficult to recover from a substantial loss in your investments. Even worse, if you aren’t able to find work quickly, you won’t have your investments to help cover the lost income.
While investing in the company you work for may be tempting, I don’t recommend it. If you’ve read this and still want to invest, then limit your investment to a small portion of your portfolio. Under 5% is probably a safe bet. That way a total loss won’t be too detrimental to your long-term goals.