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Many companies make it very easy for employees to invest money in its stock. Often time’s employees are given stock options and equity as part of their compensation package. It makes sense from the company’s standpoint because it’s additional compensation for the employee but doesn’t require them to fork out any cold-hard cash. Other companies flat out encourage their employees to invest 401(k) money directly into company stock! Does it make sense to put your money in your company’s stock? Absolutely not!

The problem has nothing to do with whether or not you believe in your company want it to succeed in the future. You can believe in your company as much as anyone and not own a dime of its stock. You’re not any more or less loyal to the company for not owning stock and you shouldn’t feel bad about getting rid of any company stock that you might already have.

The real issue with investing in your company’s stock is risk. What would happen if you had a substantial amount of your investments in your company‘s stock and your company went bankrupt? Not only would you be out of a job, but your investment portfolio would go down in value dramatically. It would be a one-two punch to your financial life! You don’t want your entire financial life to depend on the continued success of your company.

There’s also the problem of diversification in your investments. You should never have more than 10% of your money in a single investment. If you put any more money than that in company stock, you aren’t properly diversified. You should have your investments spread across a number of different companies, as well as some real estate and bonds so that you are well diversified. This way if one of your investments were to go bust, you would only be out a small percentage of your overall nest egg.

Enron is a great example of why individuals should just not invest in their company’s stock. Enron encouraged their employees to buy company stock with their 401(k) money. As Enron made its downward spiral, the company made a decision that locked their employees investments inside their 401(k), so even though Enron was failing all around them, employees couldn’t take any of their stock out of the company. They were forced to watch the value of their investments drop dramatically, and couldn’t do anything about it. This story hasn’t just happened with Enron. Many of the dotcom companies encouraged their employees to buy company stock and many employees did. The dotcoms are now gone and so is the money that those employees invested into their companies.

Countrywide Home Loans, a major sub-prime mortgage lender, is now facing a similar problem since its business model is turning out to be a disaster. The company actually required its employees to receive their 401k match with company stock. There are also rumors that they pushed their employees to put their own money into company stock. Countrywide is now on the receiving end of a class-action lawsuit because of those practices.

Investing in your company’s stock just isn’t a good idea. Financial success money is just too dependent on the success of your company. Keep a well diversified investment portfolio and invest it across thousands of companies through quality mutual funds, not just one.



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