However, many financial advisors caution that although loading up on company stock can make you very wealthy, it also can increase your risk. Your portfolio, as well as your job, is riding on the fortunes of a single company. That company may look very good at the moment, but that’s not a future guarantee. Consider the fate for employees heavily invested in the following companies.

• After hitting a high within the last year of $120 a share, Microsoft was down to $67 a share in mid-September. 

• Amazon.com fell from 113 to 45. 

• Puma Technology dropped from 102 to 24. 

• AOL went from 96 to 56. 

It isn’t just high tech stocks, either. Consider the employees of “old economy” stalwart 
Procter & Gamble, whose company stock makes up 93 percent of their profit-sharing retirement plan. That was great when the stock was returning years of double digit returns, often well above S&P 500 returns. But then it started falling well behind the S&P, and in 2000, P&G stock fell from a January high of 118 a share to a low of 53, before rebounding slightly by mid-September to 61. 

Most of these stocks will rebound fully in time, and then some. Furthermore, there are tax 
advantages to holding company stock until retirement and putting it into a taxable account 
instead of rolling it over into an individual retirement account. There also are tax 
advantages if you plan to pass stocks on to your heirs. In the meantime, however, it makes for tremendous volatility for employee or retiree investors. If company stock is the principal source for retirement income, steep price declines can delay or derail plans to retire, or reduce retirement lifestyle. 

A well-diversified portfolio minimizes the impact of a dramatic decline in one or two or even several stocks. Indeed, most investors building an investment portfolio from scratch would never commit 93 percent of their assets to a single stock—they know that’s poor 
diversification. Yet employees—particularly executives at start-up companies but even 
rank-and-file at seasoned companies—routinely load up their portfolio with employer stock. 

Many Certified Financial Planner practitioners prefer to see their clients keep a much lower company stock commitment. How much lower varies from planner to planner, but might range from as little as 5 percent to as high as 35 percent. 

Diversifying often isn’t easy for employees, since companies often will match retirement 
contributions only with company stock, they pressure employees to invest in the company, or they may restrict the sale of company stock. Here are several strategies for diversifying.

• Keep the rest of your portfolio in different industries or types of assets. If your 
  employer stock is large cap, consider putting the rest of your money in such assets as small cap, international and bonds. 

• Buying employer stock sold at a discount is probably too good a deal to pass up, but try selling older shares at the same time so you don’t increase your overall position.

• Don’t dump the stock all at once, even if you can. Spread out selling to reduce 
  volatility and minimize the tax bite.

• Some employees have borrowed against their company stock in their 401(k), forcing the sale of shares to fund the loan, then repaying the loan and investing in other assets offered by the plan.

• Consider more expensive or exotic strategies such as “collars,” which can effectively lock in a price, or tax-free swaps of stock through an exchange fund.

Work closely with a professional investment and tax advisor when determining how much company stock you should have in your portfolio, and when choosing diversification strategies. Stock options, for example, have complex tax as well as investment issues, and the timing of sales is critical.

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July 2000— This column is produced by the Financial Planning Association, the membership organization for the financial planning community.