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Q&A: Should You Hold or Sell Company Stock?

It all comes down to asset allocation and risk management.

By: Ric Edelman

Question: I’m 59 and plan to retire in a few years from a pharmaceutical company. I have a block of stock options that will soon expire. I was thinking of exercising them and holding the stock for a year or two, hoping for the price to go up. I’m concerned that if I sell now (at a modest gain), the price will go up right after I sell. However, this will leave me with about 10 percent of my portfolio in company stock — about double what it is now. Should I obtain and hold the stock or sell it now?

Ric: All investors fear two things: watching the price rise after they sell and watching the price fall after they buy. We are uncomfortable with the idea of your owning individual stocks — especially when the stock is your employer.

There have been many horror stories involving people who had their life savings in the stock of the company where they worked.

At Enron, Tyco and other companies, workers had most or all of their 401(k) accounts invested in company stock — and they lost all their money (and their jobs) when the companies went broke.

Of course, there are legitimate reasons for workers to own some company stock. In your case, you have stock options — virtually free money. Also, some employers offer their stock to employees at a large discount.

Our advice, of course, is to consult with an independent, objective financial advisor.

I don’t know which company you work for and, therefore, don’t know what the prospects are for its stock performance. But this isn’t a conversation about security analysis; it’s a conversation about asset allocation, portfolio modeling and risk management.

Without more information about your situation, I can only advise you to consider the following approach: Invest no more than 3 percent of your assets into a given security. You’re already at 5 percent, and you might go to 10 percent. That may prove unwise.

Now, should you decide to sell the stock, I’m going to give you a second piece of advice. It’s just as important — and very hard to do. Ready?

After you sell the stock, don’t ever look at the price again.

Talk with a Financial Advisor

No Cost. No Obligation.

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