How Much of Your Company's Stock Is Too Much?

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How Much of Your Company's Stock Is Too Much?

Experts disagree on what the "proper" amount of company stock is. Some will say you should never own any of your company’s stock at all. Others will tell you to limit your company-stock stake to no more than 30% of your portfolio.

What some advisors say

While every investor’s case is different, many experts naturally stress moderation: In general, no more than 10% of your portfolio should be in your company’s stock, especially if your goal is less than five years away. If that one stock has a bad streak right before you need the money, you may not be able to reach your goal.

Look at these numbers

Let’s take an example. Say you want to retire at age 62 with a $1,250,000 portfolio. You figure you can live on $50,000 a year from that nest egg. Five years before you retire, you have 10% of that portfolio (or $85,000) invested in your company’s stock and 90% (or $765,000) in a well-balanced portfolio of stocks and bonds that you expect to grow at about 8% per year.

Then say the company stock tanks, losing 20% each year for five straight years. Your $85,000 investment in company stock drops to $27,850. At the end of five years, your portfolio is worth $1,151,850—not quite what you need, but not bad. If you had 30% of your portfolio in company stock, however, you might need to work an additional three years to make up those lost dollars.

Of course, there is always a chance your company stock will do better than a balanced portfolio. If that happens, having 30% of your portfolio in the stock might allow you to retire a few years early. Remember, limiting your exposure to company stock is a defensive measure for your portfolio.

What if you have too much of your company’s stock?

If you find that you’re over-invested in your company, consider the following:

1. If your goal for this money is more than five years away, weigh your company’s longer-term prospects. Analyze your company as an investment. To learn how to do that, take a few courses on stocks. If your company’s stock is public, you can find out more about your company using various stock reports.
2. Even if the prospects look bright, weigh all the risks about investing in your employer’s stock. Most people will want to limit that risk, but some may choose to accept a higher degree of risk for the potential payoff.
3. If you decide that you need to reduce your exposure to your company’s stock, you’ll need to map out a plan. If you bought or received the shares at a very low price, you may owe significant capital gains taxes on the growth of those shares if you hold them in a taxable account. (Selling shares held in a tax-deferred account such as a retirement plan or IRA won’t trigger any taxes.)

You can either take the tax hit all at once because you can’t handle the risk. Or you can take the risk and continue to hold the shares because you know the taxes will kill you. The best choice for many, however, may be selling shares over a series of years to spread out the tax bill.