Imagine that someone has worked for forty years for a company, and is retiring with a pension and shares of stock in that company. If you are among the majority of Americans who do not have a company pension, you might find this scenario rather appealing. But, if that employer were 125-year old General Electric, you would find yourself rather disappointed.<\/p>\n
GE\u2019s stock price peaked in September 2000 at about $59 a share. Today, thanks to mismanagement, the pension plan is in trouble and the stock is worth $14. If you retired with 5,000 shares in 2000, those shares were worth $295,000. Now they are worth $70,000. GE retirees counting on their stock to augment their pensions and Social Security are certainly not happy.<\/p>\n
The recent decline in the value of GE\u2019s share price over the past year has wiped out roughly $140 billion in stock market wealth. Since the stock\u2019s peak in 2000, the company\u2019s market capitalization has fallen $460 billion. (source: The Wall Street Journal).<\/p>\n
Many company\u2019s have programs that encourage their employees to buy their stock. Often employees are able to buy company stock directly through payroll deductions. Many companies also offer their employees a discount from the current price of the stock to make purchasing it more attractive. Employees often use the dividends they receive to buy even more company stock.<\/p>\n
What if you retired from Intel in 2000 with 5,000 shares of INTC? At one point those shares were worth $73 each, or $365,000. However, soon thereafter Intel stock, like many other technology stocks, went into a decline. It reached as low of about $9 per share on a couple of occasions, making those 5,000 shares worth little more than $45,000. Today, Intel\u2019s stock is trading at about $53 per share.<\/p>\n
What is the lesson? If you own employee stock, make certain that it doesn\u2019t comprise a significant portion of your overall portfolio. Sell company stock in a systematic and disciplined manner and maintain a portfolio that is diversified across and within major asset classes.<\/p>\n
How much company stock should you own? Corey Rosen, founder of the National Center for Employee Ownership says, \u201cEmployees need to think very carefully about investing their own money beyond 10% in company stock\u201d. (source: The Wall Street Journal) At Springwater, we would suggest an even smaller allocation (e.g. 5%).<\/p>\n
If you work at Intel and own INTC stock, think very seriously about selling enough to reduce your exposure to no more than 5% of your total portfolio. History tells us that even the most highly-regarded companies can lose their way. When they do, shareholders suffer.<\/p>\n