Cents and Sensibility
Cents and Sensibility
IF your name is Bill Gates, it's probably not a bad idea to invest the bulk of your 401(k) in your company's stock. But if you're anyone else, you need to think carefully about the percentage of company stock you have in your 401(k) plan. If it's too high, you could be taking more of a risk than you realize. Don’t overweight your
401(k) with company stockOf course, you may have benefited from a significant run-up in your company's stock price. However, companies that turn in big gains also may be subject to greater volatility. Their stock price can fall just as fast -- and just as much -- as it rose.
So what should you do? Should you decline to put any company stock in your 401(k)? You don't have to go that far. For one thing, your employer may provide you with 401(k) matches in the form of company stock. Since this is essentially "free money," you may want to contribute as much as you can to your 401(k) to earn the full match.
Beyond that, how much company stock should you put in your 401(k)? There's really no "right" answer for everyone. For starters, all 401(k) plans are not alike. If you work for a large company, your 401(k) may offer a dozen investment options in addition to company stock. On the other hand, if you work for a small firm, your 401(k) may give you only a few choices. Obviously, you'd find it easier to diversify your 401(k) portfolio if you work for the large firm.
But there are other factors involved in choosing how much company stock should go into your 401(k). If you're employed by a large, stable firm with a history of earnings through all economic climates, you may feel justified in devoting a higher percentage of your 401(k) dollars into your company stock. Conversely, if you work for a start-up firm, you might be less inclined to commit a large portion of your 401(k) to company stock. While its prospects may look good now, there's no way of telling what the future holds.
Finally, the amount of company stock in your 401(k) also should depend, in part, on where you're at in your career. The closer to retirement, the less dependent you'll want to be on one company's fortunes.
Work hard for your employer. But don't tie all your 401(k) prospects to company stock. Loyalty is fine -- but in the investment world, balance and good judgment are better.
Guy Steele is a financial planner and head
of the Pali Palms office of Edward Jones. Send
planning and investing questions to him at 970
N. Kalaheo Ave., Suite C-210, Kailua, HI, 96734,
or by email at: gsteele2@pixi.com