According to the Washington Post, the average 401k account has around 40% invested in company stock. While this may seem like a safe way to diversify your investments, and express your loyalty to the company, it is important to remember that true diversification involves investment outside of your own corporation, and that the practice of investing heavily in company stock is not always as safe as it seems.
Avoiding Investment Pitfalls
You may be surprised to learn that heads of large corporations, like Bill Gates, frequently sell of shares of their own companies stock in order to diversify their holdings. This may seem to be in direct contradiction with the message that your own company sends you about investing your 401k in their stock, particularly if they offer incentives and company matches to encourage said investing. The fact is, companies don’t really see inside investing as a show of loyalty, and the more that you invest into a company, the greater risk you run of loosing the majority of your investments should the company’s stock values suddenly plummet. Your career, your finances, and your security already depend on the future of your company, why risk losing even more if the company goes belly up?
Employees at Enron thought that they were being smart by investing much of their 401k earnings back into the company, but they were in for a shock when shares suddenly plummeted down to less than a dollar each. Remember, your 401k is your nest egg for the future, and should be invested carefully and wisely.
How Much Should You Invest in Your Company?
How much of your 401k should you invest in your company? As little as possible, especially if you are planning to also invest in outside stocks. Experts recommend investing no more than 10% in company stock, and your personal financial planner will be able to help you determine exactly how much is right for you. When you do decide to invest, pay close attention to the company’s stock matching policy, and make sure that your 401k contributions are not being matched with additional stock, as this practice is very common, particularly among the larger corporations. The strongest portfolios are usually the most diversified, and although it may seem safer to stay invested within the company that you are most familiar with, doing so can sometimes backfire, and the consequences can be serious.