If you’ve worked for one company for a long period of time, you probably feel pretty good about your employer. Furthermore, because of your longevity, you may hold a large portion of your investment portfolio in the company stock. While this may seem to be a sound investment strategy, it can be far less secure than you think.
No doubt, you’ve heard of Enron, the Fortune 500 company now defunct. Jim, in his early forties, had worked for the company for his entire career. Virtually 99% of all his family’s savings and investments were in Enron stock or stock options. At the time, this amounted to well over $2 million. Based on Jim and his wife Melissa’s goals, we told them that they had already accumulated enough to accomplish their goals. Their primary risk was having all their money tied to the future of one company. Back then, the only way they could really diversify was for Jim to quit or retire from Enron.
Initially, Jim decided to quit but then reconsidered. Since he was relatively young, he wasn’t ready for a traditional retirement. He enjoyed his job and had always felt that his Enron holdings had performed better than the overall stock market. Unfortunately, Jim and Melissa made several key mistakes:
The first one, which isn’t that obvious, is that the couple had no vision for their future; they hadn’t planned for a “new” life after his career at Enron. Since he hadn’t taken the time to create this new life, it was easier to remain in the comfort zone of his current work life.
Secondly, Jim was guilty of what I refer to as ‘rearview mirror investing’. He assumed that the past performance would continue into the future. This is actually a common mistake but one you should avoid. No matter how well run a company appears to be or how experienced management is, any company can fall out of favor with the market and investors during various market cycles. This is why many investors moved away from well established but dull companies during the tech boom. Some of the upstart high-tech companies seemed to be generating much higher profits—but this didn’t last.
So, while it may feel safe to put a large percentage of your stock into the successful and thriving company you work for, it might be a good idea to diversify and consider how to plan for any potential future risks.