Diversify your company stock - Managing Your Money - Boston.com, May 24, 2010

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Employers sometimes match employee’s 401(k)
contributions by using company stock. Once the stock is deposited to
the account the employee can sell it (although they may be restricted to
holding it for a certain amount of time first.) Employees also amass
company stock through ESPP, or Employee Stock Purchase Plans, in which
the stock is offered to the employee at a discount. I often find that
employees hold on to company stock, letting it build up to become a
large portion of the account. This is dangerous for a couple of
reasons.

When a client comes to me in this situation he (or she) usually tells
me that they “know the company” and are very confident in the stock.
But how well do you really know the company? Unless you’re in a top
management position you don’t know what decisions are being made that
could affect the bottom line. And if you did know, the stock you would
be given would come with a lot more restrictions on your ability to sell
it. In addition, any company can succumb to poor or fraudulent
management. Remember Enron anyone?

Another reason to diversify is that your income is dependent on that
company. Why should your investments be dependent on the same risk?
Why open yourself up to the risk of losing your income as well as some
percentage of your portfolio, both for the same reason?

Finally your company may well be financially strong, with good
long-term prospects. But forces beyond their control – like the market
downturn we have just experienced – could reduce its value. I often
think of a prospective client who walked into my office in 2007 with a
$1 million 401(k), all in GE stock. He “knew the company” and wasn’t
going to diversify until the stock hit $40 (it was around $36 at the
time.) Needless to say he didn’t hire me because my advice was to
diversify. I thought of him over the next few years as I watched GE hit
$40 briefly – and then sink to about $5 during the recent recession. I
certainly hope he sold when he said he would.