Buying stock from your own company seems like a no-brainer, but is it really a wise decision? Our friends over at Business Insider weigh in.
Buying stock in your company seems like a logical investment at face value. What better way is there to show the higher-ups not only your loyalty but also your willingness to take a bet on them?
The problem is that you're only making yourself more financially vulnerable in the process.
Read on for more.
All you've got to do is recall the fates of the Lehman Brothers, MCI WorldCom, and Enron employees who watched their retirement savings vanish when the companies tanked.
Their stories should serve as a cautionary tale, and yet the 40 percent of workers whose 401(k) plans allow them to buy company stock still allocate 16 to 19 percent share of their portfolio to the cause, according to a 2012 report by the Employee Benefit and Research Institute.
Most experts recommend investing about half that much, if any, into employer stock.
Think of it this way. If you work for a company, you are basically already an investor there. You are taking a risk on the fact that they'll succeed and you'll be gainfully employed for the long haul. If they go under, you will lose your income and, in some cases, your benefits, too.
If you've got 20 percent of your retirement savings also tied up in the machine, then that's putting even more of your finances at stake.
Moshe Milevksy, a finance professor at York University in Toronto, has long advised individual investors against this path. He recently told Reuters' Lewis Braham the wiser option would be to steer their stock choices in the opposite direction of their industry altogether (more specifically, in "individual industry-focused exchange-traded funds to cover every other sector in the market but their own.").
"That way, the intersection between your career and your investment portfolio is avoided," he said.
The bottom line: Investing a portion of your portfolio with your employer isn't a surefire trip to the poorhouse, but be careful how big a slice of your pie you're willing to give up.
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