Company Stock: How Much is Too Much?

Working for a publicly traded company and having the opportunity to purchase company stock in your retirement plan has many benefits. Not only do you get to reap the benefits of your hard work but knowing you have a stake in the company directly leads to working harder and taking more pride in your work and pride in your company. Your company knows this; that is why they offer company stock in your retirement plan. Being proud of your work and company you work for is great but it often leads to biases that can be detrimental and sometimes catastrophic to retirement assets.

“My company won’t go out of business.” is probably the most common sentiment of people who are grossly overweight in their own company stock. The fact of the matter is that companies, no matter how profitable they are can and likely will fail. Even Jeff Bezos, Executive Chair and founder of Amazon.com was quoted during an interview saying “I predict one day Amazon will fail”. When a company becomes financially upside down and their assets outweigh their liabilities to a point of no return, they will file for bankruptcy and their stock price goes to zero dollars. That means, any stock you have in that company all of the sudden has no value. If this is stock in the company you work for, not only are you out whatever your investment was but you likely will be laid off at the same time. Some factors that cause companies to fail include: economic issues, management decisions, fraud, competition, technology, legislation, consumer interest changes, etc. Here are a few examples of corporations that filed for bankruptcy much to the surprise of many investors AND employees:

Lehman Brothers

  • Total assets at bankruptcy: $691.1 Billion
  • Date of bankruptcy: September 15, 2008
  • Lehman Brothers at the time was the fourth largest investment bank in the United States, employed 25,000 people and had been in business for 158 years before filing for bankruptcy in 2008. Their downfall came from 3 factors. They were involved in the sub-prime mortgage lending crisis, assets were downgraded by credit agencies and consumer confidence was lost causing the stock price to drastically fall forcing Lehman Brothers to file for bankruptcy.

Worldcom

  • Total assets at bankruptcy: $103.9 Billion
  • Date of bankruptcy: July 21, 2002
  • Worldcom was the second largest telecommunications company in the United States and employed 80,000 people. The corporation was caught up in an accounting scandal where they were using illegal accounting methods to hide a loss of earnings. The consequence of these illegal practices led to the company filing for bankruptcy.

General Motors

  • Total assets at bankruptcy: $82.3 Billion
  • Date of bankruptcy: June 1, 2009
  • Poor management decisions basically led to General Motors failing. According to Harvard Business Review, they were too slow to innovate because of their size, they were too bureaucratic and unable to adjust to changing markets and their dealer network was too large. They were almost forced into bankruptcy in 1991 when they posted a $4.45 billion loss. In 2009 they did not have enough cash flow to stay afloat during the 2008 recession. They received a $40 billion bailout from the United States Government which caused them to have to re-structure the entire company.

Even if a company does not go out of business or seems “too big to fail” (which the previous examples should close the book on that) they can still falter during your lifetime. If you are overweight in any stock including your own company stock, one of these falters at the wrong time can be detrimental to your overall portfolio if not still catastrophic.

So, how much of your retirement portfolio should be allocated to company stock? A general rule of thumb is no more than 10%. The correct allocation for you will depend on your goals, risk tolerance and time horizon. If you are younger, have a longer time horizon to retirement and willing to take on more risk; 10% of assets allocated to company stock would be fine. If your risk tolerance is low, you are older or already retired and need to focus on asset preservation rather than growth then your allocation of company stock should be lower. If you are a client of Whitaker-Myers Wealth Managers, you likely know your current goals, risk tolerance and time horizon. If you are a prospective client, let’s schedule a meeting and discuss these topics and how it pertains to your particular situation. Goals, risk tolerance and time horizon also change throughout your life. Having an advisor in your corner to keep your portfolio in check with these factors is crucial to a successful retirement plan.

Author: Kelly Kranstuber