There is an old investing
adage, “invest in what you know”, but should you invest your hard-earned money
into the stock of your employer? The answer depends on a variety of factors,
but by following these tips you can reduce your downside and position yourself
to potentially reap great gains.
It may seem obvious,
but you should only invest in your employer if you like your company and what they
do. There are so many people in the U.S. that are unhappy at work, it makes
common sense to invest in firms that you respect and like the product or
service they offer. While your employer may be very profitable and growing, it
can be quite a conflict to invest discretionary dollars into a firm you do not
The next step is to
consider how much money should you invest? This is where your financial advisor
should be helping you with this decision, as the answer is highly specific to
your income, savings, risk profile and so many other factors. However, one
question your financial advisor will quickly ask is about whether the company
is publicly held or privately held. If the former, an investment is inherently less
risky. If the latter, depending on a variety of factors you may not even be
legally able to invest.
employer is publicly held, meaning its stock is traded on an exchange, the
question of how much to invest is quite important. Coupling the “don’t put all your
eggs in one basket” notion of being diversified, along with the knowledge that
sometimes people overinvest in their own company, should limit the percentage
of your investments into your employer’s stock. The extreme example being Enron
where management pushed employees to invest abnormal amounts of their 401k into
Enron stock. At one point more than 50% of the 401k plans $2.1 Billion was in
company stock. When the company failed, thousands of employees were wiped out.
The upside of
investing in your employer can be quite significant. As an employee, you likely
have an extraordinary view into the firm, its prospects and its industry. While
you cannot avail yourself of non-public information, you likely have a great
understanding of how customers feel about your products and services, you know
how management treats you and if you have been at the firm for a period of
time, see firsthand how the firm performs in good time and bad.
If all these
indicators point in the right direction, then investing in your employer can be
a terrific choice for you. There is also an interesting effect on people when
they put their own money into something, it usually does force people to think
in different ways, which can not only be good for you as an investor but may
have positive effects on you as an employee and team member.
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