Investing in your company’s stock is nothing out of the ordinary. Many people invest in their employer’s stock without much thought. Being heavily invested in a single stock is risky no matter if you work there or not. There are several reasons why we do this and some pitfalls we should avoid.
Percentage of Retirement Plan Assets Invested in Stock of Employer
Familiarity bias is our tendency to choose the things that are familiar, or well-known to us. This bias can be harmless in some areas of life, such as choosing the same restaurant over and over again, taking the same way home from work every day, or dating an ex (okay, this may be dangerous).
This bias is not as innocuous when it comes to your investments. It is one of many behavioral flaws that can hinder your investment decisions. Prudence says that you should diversify your investments. Familiarity bias leads people to do the opposite. They find safety in holding companies that they know well. This familiarity and false sense of security blinds them to the benefits of diversification. They think, “why would I hold 400 companies I don’t know when I can hold onto a few that I do?”
Familiarity bias can be especially strong when you work at the company that you’re invested in. The temptation only compounds the longer you work there. From the inside, you may think the company will never fail. I don't care how well you resonate with the core values, how good the product is, or how competent the leadership is, no company is immune to failure.
A study conducted by the Kaufman Foundation and Inc. Magazine looked at the 5,000 fastest growing companies in the US over a 5 to 8 year period. What they found surprised them: About two-thirds of these companies had either gone out of business, diminished in size, or sold at a reduced value. This risk isn't limited to small companies. If history has taught us anything, it’s that no company is too big to fail. Did you know that the average life expectancy of a Fortune 500 company has fallen from 75 years to about 15?
Everyone Else Is Doing It
When investing, we don’t only fight internal pressures, like familiarity bias, we fight external pressures too. I have spoken with many of my clients that have stock options through their employers. Most have mentioned feeling pressure to be heavily invested in their company’s equity. They fear that if they don't, they will be overlooked for promotions and ostracized by leadership. While some of this is only perceived, a lot of it is very real. I have some clients that were flat out told that this was true.
This is peer pressure at its worst. Employees should not be punished for being more risk averse than others. An employer should have no bearing on what an employee's portfolio looks like.
I understand that employers want employees to have a vested interest, but is it worth staking their livelihoods on it?
Danger, Will Robinson
You don’t have to go straight to Enron comparisons to see the dangers of being heavily invested in a company’s stock. A company doesn't have to go belly up to ruin someone's retirement. Individual companies go through regular periods of significant volatility. Just ask Gary Zabroski. Gary worked for GE for over 40 years and is now looking for a new job when he thought he would be retiring. He, and others like him, have seen the GE stock price go from $29.80 on January 1, 2017 to $11.53 as of September 27, 2018 (that’s over a 60% drop).
A company stock plan can be a way to increase employee engagement and create a vested interest in the company’s success, but internal and external pressures can lead people to making very unwise investment choices. Most people should not have more than 5 or 10% of their portfolio invested in the stock of their employer. The company that made you could just as easily be the company that breaks you.
How About Now? - The Irrelevant Investor
What GE’s Board Could Have Done Differently - Harvard Business Review
When Workers are Owners - The Economist