A common question investors have is “How much of my investments should be in my company’s stock?” Many of us work for publicly traded companies (Stocky worked for Medtronic and Foxy Lady used to work for VF). Many of those companies include stock as a significant part of their employees’ compensation. So what is an omnivore to do? The short answer is: Don’t invest a lot in your employer.
It adds up
The general thinking among companies is that it’s good for their employees to own company stock. It motivates them to work hard, so then the company does better, which then raises the stock, and that finally makes the employee richer. See everyone wins.
My sense is that before 2000 compensation in the form of stock was much more prevalent. I can speak to my experience at Medtronic: The default for your 401k investments was Medtronic stock. When they did the 401k match, the match was in Medtronic stock. They also have a program where you can buy Medtronic stock at a 15% discount compared to the market price. You had the option to take your bonus in cash or get a larger bonus in Medtronic stock options. Long-term incentives are given in stock and options. High performers can get awards of stock or options.
What difference can you really make?
The company wants you to do it because collectively if a lot of their employees own stock, they are probably motivated to do better. But as an individual, what difference can you really make? I know that sounds anathema, like when people say they don’t vote because one vote doesn’t make a difference (I do vote in every election, but the way).
Let’s think about that for a minute. Stocky worked at Medtronic, a company which has about 50,000 employees and earns $20 billion each year. Actually, I think I did really good work, and let’s imagine that because I worked my furry little tail off, I was able to develop programs that led to an extra $2 million in sales. That’s a lot actually (I think I might have been underpaid), but compared to the bigger picture, that such a tiny drop in the bucket that it wouldn’t affect Medtronic stock in any possible way.
On the other hand, if I bust my tail and work hard, my bosses will see that and I’ll get a raise and a promotion. That’s where the real upside for me is. Not in the impact on the stock. I’m sorry to say that, but it’s true. The payoff in owning stock (compared to owning a diversified mutual fund) just isn’t there. But the downside is very real if things don’t go well (more on this in a second).
Since Medtronic is a really huge company, maybe an individual can’t make much of a difference. But wouldn’t an individual employee be able to have a bigger impact on the company’s stock if they were at a smaller company? Maybe it makes sense for people in smaller companies to own more of their company stock for that reason.
The logic is sound—certainly if you work at a smaller company your individual contributions will have an outsized impact. But the negative is that your risk goes up as well. Larger companies tend to have greater margins for error when things go bad. If you’re in a smaller company, the risk of bankruptcy or some other catastrophic event with the stock is so much higher. And remember, as an investor you’re looking to lower risk not raise it. So with all this I don’t the think argument for an individual to be a shareowner so they can drive the stock upwards holds a lot of weight, especially when you compare it to the downside.
What happened to loyalty?
If you own a lot of your employer’s stock, you’re violating the first rule of diversification. The whole point of diversification is to make sure that one company or one sector or one “something” can’t hurt you too much if everything goes to hell. Think about that with your own company. The single most valuable “financial asset” you have is probably your career and the future earnings that go with that.
Now imagine that something goes terribly wrong with your company (a product recall, losing a lawsuit, missing the boat on a market trend, etc.). If you’re an employee that sucks because you’ll probably get smaller bonuses and raises; at the extreme you might get let go. If you’re a shareholder that sucks because the value of your stock will go down. If you’re an employee and a stockholder you get the double whammy. That is what diversification is trying to save you from.
But wait a minute. I can hear some people say stuff about loyalty and having faith in your company and putting your money where your mouth is. To that I say “hooey”. If you’re working hard every day to help your company succeed, isn’t that loyalty and faith?
Remember that your portfolio is ultimately meant to support you in your life’s goals. For most of us that probably means securing a comfortable retirement.
Just to put things in perspective, every year a few stocks that get removed from the S&P 500 because of “insufficient market capitalization”. That is French for “the stock went down so much the company wasn’t considered S&P 500 material any more.” 7 stocks out of 500 doesn’t seem like a lot but that’s about 1.5% of the entire index. And remember that the S&P 500 as a whole was up 29%!!! That was an awesome year for the entire index, yet still 7 companies couldn’t make the cut. Imagine what would happen in an average year or even a bad year.
Let’s think about the fate of the employees at those companies for a second. Being kicked off the S&P 500 is a bit of a slap in the face so you know things at the company aren’t good. There’s probably a lot of things happening like stores closing, people being laid off, salaries being frozen, moratoriums of new hiring so the existing employees have to work more. Just a bunch of bad stuff, right? So if you’re working there life probably isn’t awesome, and the idea of polishing up your resume is probably pretty top-of-mind.
Now imagine all that is happening while a big portion of your portfolio is taking a dive (remember, these companies got booted off the S&P 500 because their stocks went too low). Ouch. That is definitely rubbing salt in the wound. In the investing world managing risk, and minimizing it where you can without impacting your return, is super-duper important. When you own a lot of stock in your company, you’re just taking on unnecessary risk.
So there we are. There’s definitely some romantic notion of owning stock in the company you work for. It seems like the right thing to do. But you’re just taking on risk needlessly. My advice is that you should really keep that to the absolute minimum. In the Fox household, we sell the Medtronic stock when we can. It’s not that we don’t think it’s a great company (it is) or we don’t have faith in its future prospects (we do). It’s just we don’t want to bear the risk that something really bad could go down, leading to me possibly losing my job just as your portfolio is doing a belly flop.
How much of your portfolio is of your company stock?