Many employees are happy in their job and believe in their employer – the company’s future and mission. Companies are fortunate to have team members who work hard and add value. Employees are fortunate to find a company that is a good fit.
But believing in your employer does not mean putting your finances at risk. That’s why we always recommend minimizing the amount of stock you own in your employer.
Whether you receive stock options, restricted stock, restricted stock units (RSUs), discounted stock purchased through an employee stock purchase plan (ESPP), or other awards, it almost always makes sense to sell as much as you can as soon as you can.
Those of you who have been around long enough can guess the story I will now recount.
In 2000, Enron was one of the darlings of corporate America. Its peak market valuation was $70 billion. Within 18 months, the stock was worth nothing, and the company was on the verge of bankruptcy. Almost every employee lost their job. If that wasn’t bad enough, Enron had aggressively encouraged employees to invest their 401k accounts in Enron stock. Shockingly, two-thirds of 401k assets were in Enron stock – over $1 bn, owned by 15,000 employees. That all went up in smoke.
Sadly, earlier this year, we had a repeat – admittedly not quite as bad, but still tragic and entirely avoidable. On the way to bankruptcy, Silicon Valley Bank’s stock was wiped out in just several months. 20% of the company’s 401k was invested in SVB stock – about $245 million. That all went to $0.
Rule #1 of investing is diversification. You already have significant exposure to your employer’s financial results. You may suffer a pay cut or lose your job if they have financial difficulties. Their troubles may be shared by companies in the same industry, making it even harder for you to find another job if needed. I have seen this story play out repeatedly over the years: real estate in the 1980s, oil & gas in the 1990s, internet services, and telecoms in the early 2000s, and now, perhaps, technology.
If you are already at risk, why add to it?
The solution is to sell whatever stock you can as soon as you can. If your employer is successful, you will benefit through job continuity and, quite likely, raises and advancement. And you get those benefits without owning one share of stock.
Minimizing the employer stock you own isn’t a sign of disloyalty. It’s a sign that you understand risk.