If company stock is part of your compensation package at work, you might want to give your entire investment portfolio — including retirement savings — a closer look.
Among workers who receive company stock options or participate in an employee stock purchase plan, about 29 percent of their net worth comes from those sources, according to a new study from Schwab Stock Plan Services. On top of that, 73 percent also own additional shares in their company, mostly through their workplace retirement plan.
In other words, they might have too many eggs in one basket.
“You never want to be in a position where the price movement of one particular investment can radically change the outcome of your goals,” said certified financial planner Douglas Boneparth, president of Bone Fide Wealth in New York.
The survey, conducted in July, canvassed 1,000 people ages 25 to 70 who either participate in an employee stock purchase plan (which lets you buy company shares at a discounted rate) or are awarded stock options (the right to purchase later at a set price) as part of their compensation. The average value of the company stock held this way is just shy of $99,000, according to the study.
Schwab generally recommends that shares in your own employer make up no more than 10 percent to 20 percent of your portfolio, although some advisors suggest an even lower limit of 5 percent to 10 percent.
Millennials hold the most in company stock — 42 percent — relative to their overall net worth, compared with 24 percent for Generation X and 19 percent among baby boomers, according to the study.
While the amount you have invested in your company could be intentional, it’s important to understand how a concentrated share can affect your overall investment portfolio.
For illustration purposes: Say your company shares represent $300,000 (30 percent) of your $1 million in invested assets. Now say there’s a company-specific problem that causes those shares to drop by a third to $200,000. In this scenario, you’ve lost 10 percent ($100,000) of your entire portfolio’s value because of one stock.
Now say that on top of that, the broader market has a 20 percent correction. So in addition to that stock-specific drop, your other equity holdings could be hit as well.
“That’s how you get a compound fracture when you have a concentrated holding,” Boneparth said. “You’re not just waiting for the stock market to recover, but one specific company to recover.”
Depending on your risk tolerance, that might be problematic. Many advisors use the term to describe how well you can stomach volatility in the value of your portfolio and how long until you need the money.
“If you understand the risk and are comfortable with a high concentration in company stock, it might be right for you,” said Marc McDonough, senior vice president of Schwab Investor Services. “But so often people just haven’t taken the time to really look at it.”
If you’re among those who haven’t evaluated how their company stock fits into their overall portfolio, consider this: Boneparth recently met with a soon-to-be retiree who had 80 percent of his net worth (excluding his home) invested in his company’s stock. If that stock were to tank, his entire retirement plan would be at risk.
“If you have a concentration of company stock, you should examine how it fits in across all your accounts,” Boneparth said.