San Jose, Calif. -- Imagine that two decades ago you signed up to buy shares in your company through the stock purchase plan, and year after year you set them aside for retirement. Then, in the 1980s, you enrolled in the company's new 401(k) plan, and your shares piled higher and higher.
Now imagine that retirement day is here. And when you check the newspaper, the stock is trading at $50 -- right where it was when you started -- and far below the price you paid for many of the shares, when the stock was rising to its all-time high of $170. Over the two decades, you realize, the stock grew less than 2 percent annually, even though dividends were reinvested.
What sort of company could take you for such a wild ride? International Business Machines Corp.
And that illustrates why Americans should make sure that their ++ fortunes don't hinge on the continued success of their company.
It's not that owning stock in the company is a bad thing. Company stock can motivate employees by giving them a sense of ownership. And some employees use it to buy financial independence.
But many investors have too much of a good thing. Company stock can overwhelm your tolerance for risk while underwhelming you with sluggish performance.
Investors sometimes can see the bad news coming and react. But they risk being crippled overnight by unforeseen events such as product sabotage, a liability lawsuit or an earthquake that knocks out an important plant.
Bob Wacker, a financial planner and tax specialist who heads Robert E. Wacker Associates in San Luis Obispo, says he has seen clients on the verge of retirement who had 80 percent of their portfolio devoted to stock in their company.
"Maybe they've been lucky to that point, but it's a scary proposition," he says. "They're at the point where they can't rebound from a sharp drop in the stock price."
Diversification can carry a price. Dan Beatty, a financial planner with John W. Brooker & Co. in Oakland, Calif., says one of his clients relies disproportionately on Chevron stock inherited years ago.
But if the client diversified, he could see nearly half his holdings evaporate to pay taxes and broker commissions on the investments he would buy instead.
There are steps you can take to reduce your exposure to your company's stock.
First, total up your investments, including those in retirement accounts, to calculate the percentage represented by your company stock. Some planners like clients to have no more than 10 percent allotted to company stock.
Wacker doesn't get too concerned until clients hit 20 percent and age 45. At that stage, he advises clients to start a systematic selling program to spread out the tax bite and, in a sense, to practice "dollar-cost averaging in reverse." The goal is to pare the holding to 10 percent of the portfolio by age 60.
Tom Ford, a financial planner who heads Ford & Associates in Los Altos, Calif., advises clients exercising stock options to sell the bulk of their holdings, depending upon market conditions and tax considerations. The goal is to exercise stock options, then sell regularly to buy a diversified portfolio that can fund a comfortable retirement.
And for investors with smaller portfolios who buy stock at a discount through their company, it may make sense to sell the stock immediately upon its purchase, then roll it over into a diversified mutual fund.