COMPENSATION AT WORK: EMPLOYEE STOCK OPTIONS
ISOs, NSOs and the language of an employee stock option program.
How much to invest in company stock?
Be careful not to invest too much in company stock as your job and your retirement savings could be at risk. Over time, the company stock could become one of the biggest assets you own – perhaps more valuable than your 401k account and even more valuable than the house you own.
That is a problem – for two important reasons:
- Concentration risk. Professional money managers – those who manage mutual funds, pension funds, endowments and institutional funds – typically place no more than 5% of assets into a single stock. If you have a significant percentage of your net worth – say, 30% or more – in the shares of a single company, you are taking a risk that financial professionals would not take.
- Unemployment risk. One reason people lose their jobs is because their employer suffers a financial setback. So, at the very time the company’s stock is falling in value – possibly even to zero when it files for bankruptcy – you could find yourself out of work.
Your ability to retire comfortably could be in jeopardy if you have invested a high percentage of your retirement account in company stock. Sudden unemployment and loss of retirement funds invested in company stock has happened to people who worked at major companies like Sears, Toys“R”Us and Enron. It was bad enough that their employees lost their jobs – but even worse, it hurt their retirement accounts at the same time. So for that reason, we strongly recommend that you diversify, that you don’t put too much money in a single stock.
Ideally, you should own thousands of stocks because the returns of the stock market tend to be concentrated in a very small fraction of the stocks in the market. If you hold only a few dozen stocks, you might miss out on those few big winners.
The rules and specifics for every employee stock options program are company-specific, so it makes sense to get a copy of your company’s plan and study the details or hire a financial professional to review them for you. If you have an employee stock option program or another equity compensation plan at your work and you want to know more about how it can work as a part of your overall integrated wealth plan, call an Edelman Financial Engines planner today. We’re here to help.
Investing strategies, such as asset allocation, diversification, or rebalancing do not assure or guarantee better performance and cannot eliminate the risk of investment losses. There are no guarantees that a portfolio employing these or any other strategy will outperform a portfolio that does not engage in such strategies. Funds and ETFs are subject to risk, including loss of principal. All investments have inherent risks. There can be no assurance that the investment strategy proposed will obtain its goal. Past performance does not guarantee future results.
Neither Edelman Financial Engines, a division of Financial Engines Advisors L.L.C., nor its affiliates offer tax or legal advice. Interested parties are strongly encouraged to seek advice from qualified tax and/or legal experts regarding the best options for your particular circumstances.