Avoid Having Too Much Company Stock in Your 401(K)
By Saghir Aslam
Rawalpindi, Pakistan
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
If you work for a publicly traded company that’s eyeing growth, allocating some of your retirement plan to company stock may be a great way to grow your assets
However, it can also carry risks along with the potential rewards, especially if your retirement savings become too tangled up in one spot. Here are some points that everyday401 (k) investors should keep in mind when considering company stock.
Taking Stock of Company Stock
many public companies offer their employees benefits plans that include a matching contribution to 401(k) plans in company stock or offer deferred compensations plans that include company stock .Profit-sharing contributions from the company may also be invested in company stock .In other instances ,the employer may offer a stock –purchase plan that allows employees to buy stock at a discount of up to 15% from the current market price .Incentives ,such as bonuses for reaching performance goals, may also feature equality grants such as stock options and restricted stock as an alternative to cash compensation.
None of these scenarios by themselves is anything to fear. But the more you choose company stock in your 401(k) or receive it as a bonus; you should bear in mind important caveats. Investing in any single security imposes additional risk to your savings or portfolio. Not only are you subject to the normal volatility in the overall market, but you’re also subject to that particular company’s current and future performance and financial health.
It’s important to consider the individual company and to be diligent about regularly reviewing your overall exposure.
Making Smart Investment Selections
Diversification is key here. Every year, it’s a good idea to conduct a review of the percentage you’ve accumulated in company stock. Given the fact that your employment and other benefits may be provided by this same employer, additional investment in your 401(k) may result in more risk than reward and may not be the optimal strategy.
Consider also the other benefits that may be accumulating, such as any Employee Stock Purchase Plans or deferred compensation plans can be subject to creditor claims if the company fails. You should also consider your overall allocation into that particular sector or industry-not only within the 401(k) but also your IRA and taxable investment accounts.
10% Happier
Having a number in mind can help keep you on the right path when it comes to allocation and diversity. Given the fact that your primary income source, healthcare, and potentially retirement benefits are coming from your employer, considerations should be exposed to. Experts warn that anything over 10% in company stock is extremely bullish and risky. Keep in mind we have the tools to comb through your other holdings, such as mutual funds, to help show you if they invest in the same security. Take advantage of our services to provide a clear picture of your exposure to that industry or sector.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr Aslam does not have anything for sale.)
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