Do You Have Too Much Company Stock?
Diversification is the key to any successful portfolio. However, recently, individual tech stocks have been all over the news and I’ve been getting asked, “How much company stock should I have?” or “Do I have too much?” Today, I wanted to answer these questions and clear up some misconceptions surrounding the topic in addition to the quantity you should hold.
Don’t look at stock in companies as investments.
First and foremost, it’s misleading to think of company stock as an investment when it’s more akin to a gamble. Investments should never have the chance to go to zero and should always be expected to grow faster than inflation over time.
Any stock in a single company, be it one you work for or not, is not truly an investment because you can’t be sure it meets these qualifications.
How much stock should I have in a company?
While I generally dislike rules of thumb, a safe starting point is to have no more than 10% of your investible wealth in company stock. This 10% is essentially your gambling portfolio which should include any number of individual stocks you buy and sell. As you sell your company stock, the money should filter into your long-term investment strategy.
Why such a low percentage?
There’s simply no way of knowing what your company’s stock is going to do. You’re already very dependent on your company for numerous things:
- Your salary
- Future growth and income
All of these rely and depend on your employer. No matter how much you know and like about your company, you already have too much dependency on their success to risk much further. Confidence in your company can be a wonderful thing but is also quite dangerous. Being so close to what’s happening limits our ability to look at the entire competitive landscape and how it might be changing, making it impossible to see the forest through the trees.
So, make sure you keep your company stock in check, including the unvested portion and that you’re transitioning those funds into your long-term portfolio over time.