Many companies offer their employees a stock purchase plan, enabling them to purchase company stock at a discounted price and invest in the company they work for.
While this can be a great way to invest in the stock market, as an investor you need to question whether it’s good to load up too much on your company’s stock — or any company’s stock, for that matter.
Investing in your company may be a good idea, but you need to make sure you set some guidelines and strategies to diversify your holdings not only among individual stocks other than your company’s, but among industry sectors as well.
Although diversification does not ensure a profit or protect against loss, doing so may help reduce the effects of the price fluctuations that will undoubtedly occur in your portfolio.
As you decide whether to participate in your employer’s stock purchase plan, keep in mind that owning too much of any single stock is rarely a good idea. While you may be confident of your company’s prospects for success or you want to demonstrate your loyalty to your employer, you need to recognize that you may take on additional risk if you don’t diversify.
Also, as you evaluate your holdings, don’t overlook the potential danger in concentrating your investments within one industry, even if you spread your investments among several stocks in that industry. Oftentimes when bad news hits one stock in an industry, it can also have a similar impact on other companies within the same sector.
So, how can you help reduce the risk in your portfolio? One way to help protect yourself is to diversify your portfolio among several stocks. In addition to your company’s stock, you should try to broaden your equity holdings to include 20 to 30 stocks in at least six to eight industry sectors with different investment characteristics.
Keep in mind that no more than 25 percent of your total portfolio value should be invested in any one sector.
Another good rule of thumb is to have no more than 15 percent of your total portfolio — including investments in your 401(k) and IRA — invested in one single stock.
You should strive to maintain a balanced asset allocation with not only stocks in different industries but also bonds and other investment vehicles as well. Keep in mind that an investment in stocks will fluctuate in value and when sold might be worth more or less than the original investment.
Once you have reviewed your portfolio and evaluated your investment objectives, you may realize that you have a “concentrated position” — that is, you have too much of your holdings in a single stock or you are heavily invested in a single industry sector. If this is the case, it is a good idea to contact a financial advisor and discuss strategies for reducing your concentrated holdings.
There are a variety of strategies that can help you reduce the risk involved in having concentrated positions in both taxable and tax-deferred accounts.
Your investment objectives, risk tolerance and time horizon will help dictate the appropriate asset balance for your financial situation.
Because each and every investor has different investment needs, seeking professional assistance is usually the best alternative to avoid keeping your eggs all in one basket.
This article was written by/for Wells Fargo Advisors and provided courtesy of Whitney McDaniel, financial advisor in Beaufort at 843-524-1114.
Any third-party posts, reviews or comments associated with this listing are not endorsed by Wells Fargo Advisors and do not necessarily represent the views of Whitney McDaniel or Wells Fargo Advisors and have not been reviewed by the Firm for completeness or accuracy.
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