In this video, I explain the risks of having concentrated company stock.
Why you shouldn’t hold too much company stock Transcript
Hi, this is Tom Lo from Vested Financial Planning. I’m here today to help you understand why you should care about having too much company stock. The reason you should care is because there’s a ton more risk and volatility in holding a single company stock versus a diversified portfolio.
A great example of this is the company Enron. It was an energy company in the late 90s, early 2000s. It was high-flying and dominating its industry. The stock climbed for years, all the way up to more than $90 a share by 2000. What happened was an accounting scandal broke and within months the stock had dropped to less than a dollar a share, so from more than 90 to less than a dollar. Unfortunately, there were many Enron employees who had almost all of their 401k and retirement in company stock. There were employees who were close to retirement, who lost hundreds of thousands of dollars because they all had it all in Enron.
And so that is the risk you take when you have a lot in single company stocks. And that’s why you ought to think about diversifying if you are in that position.
I have some clients who come and say to me, well, I don’t think we’re going to have an accounting scandal and my response is, look, there are many things that you don’t have control over that could affect the business and the stock. So you just want to make sure that you are not too highly concentrated in a single company stock and if you are, figure out how to reduce that concentration.