Many clients ask whether it's a good idea to hold on to your employer's stock. Bottom line up front: No. Both your paycheck and the value of your company's stock are contingent on the company's success. If your employer falls on hard times, both will be in jeopardy. It's much better to diversify these bets.
Looking a little deeper, we'll point to a mountain of lawsuits specifically relating to company stock held in a 401(k). This became a big issue in the wake of the Enron bankruptcy. It came up again as a result of the Wells Fargo phantom account scandal, and yet again when GE had a near-death experience. We can point to multiple incidents where this has been a disaster for employees. After seeing the same story repeat every few years, we simply think the risk doesn't justify the potential benefit.
As always, there are some exceptions. Stock awards are often given as an added perk in addition to salary and retirement benefits. If you're a true believer in your employer's potential and you don't need the extra money, go ahead and let things ride. If you do this, it should truly be speculative money -- savings that legitimately wouldn't affect your financial well-being if they disappeared completely. We've also seen a number of employee stock-purchase plans (ESPPs) that allow you to buy your company's stock at a discount to market value. These plans can be a good deal -- imagine buying stock at a 50% discount! But these plans usually come with a number of strings attached. Be sure you understand these restrictions. If you participate in such plans, we think the same basic principle should apply: keep this part of your portfolio limited to funds that don't make a meaningful difference to your overall financial health.
