There is an old investing adage, “invest in what you know”, but should you invest your hard-earned money into the stock of your employer? The answer depends on a variety of factors, but by following these tips you can reduce your downside and position yourself to potentially reap great gains.
It may seem obvious, but you should only invest in your employer if you like your company and what they do. There are so many people in the U.S. that are unhappy at work, it makes common sense to invest in firms that you respect and like the product or service they offer. While your employer may be very profitable and growing, it can be quite a conflict to invest discretionary dollars into a firm you do not believe in.
The next step is to consider how much money should you invest? This is where your financial advisor should be helping you with this decision, as the answer is highly specific to your income, savings, risk profile and so many other factors. However, one question your financial advisor will quickly ask is about whether the company is publicly held or privately held. If the former, an investment is inherently less risky. If the latter, depending on a variety of factors you may not even be legally able to invest.
Assuming your employer is publicly held, meaning its stock is traded on an exchange, the question of how much to invest is quite important. Coupling the “don’t put all your eggs in one basket” notion of being diversified, along with the knowledge that sometimes people overinvest in their own company, should limit the percentage of your investments into your employer’s stock. The extreme example being Enron where management pushed employees to invest abnormal amounts of their 401k into Enron stock. At one point more than 50% of the 401k plans $2.1 Billion was in company stock. When the company failed, thousands of employees were wiped out.
The upside of investing in your employer can be quite significant. As an employee, you likely have an extraordinary view into the firm, its prospects and its industry. While you cannot avail yourself of non-public information, you likely have a great understanding of how customers feel about your products and services, you know how management treats you and if you have been at the firm for a period of time, see firsthand how the firm performs in good time and bad.
If all these indicators point in the right direction, then investing in your employer can be a terrific choice for you. There is also an interesting effect on people when they put their own money into something, it usually does force people to think in different ways, which can not only be good for you as an investor but may have positive effects on you as an employee and team member.
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