Minimize Company Stocks to Maximize Returns

Physician's Money Digest, December 2005, Volume 12, Issue 16

After Enron, WorldCom, and a host of otherpublic companies that have either collapsedor taken nosedives in recent years, you wouldthink workers would wise up. Common wisdomamong financial advisors is that employees participatingin company-sponsored retirement plans generallyshould invest no more than 10% of theiraccount's assets in their employer's stock.

Yet company stock accounts for 23% of accountvalues, according to a recent study by the financialresearch company Greenwich Associates. To employees'credit, that number is down from 33% in 2001,according to a Hewitt Associates study. But a 2003study by the Employee Benefits Research Instituteand the Investment Company Institute found that13% of employees allocated over 80% of their401(k) to company stock.

Risky Investing

Although medical practices and hospitals typicallyare not stock-holding entities, physician-investors needto heed this advice and make sure that their spouse's401(k) does not include too much of their company'sholdings. So, what are the risks of your spouse allocatingtoo much of their 401(k) to company stock?

Too much of any single stock magnifies a losswithin a portfolio should a particular company'sstock sag, making an investor's portfolio more vulnerableto change in the markets. According toGreenwich Associates, that's one reason that theaverage defined-benefit pension plan, funded by theemployer and professionally managed, maintainsonly 2% in its own company stock.

Declining stock values are hit with a doublewhammy. Aside from risking company-stock-ladenretirement portfolios, the same forces causing thestock to decline may simultaneously cause plan participantsto lose their job and income.

Diversify by Industry

Not only should your spouse limit the amountinvested in their company's stock, both physician-investorsand spouses should avoid concentratingtheir investments within a single industry, such as thetechnology sector. For example, if your spouse worksfor a high-tech company, they may also want to minimizeholdings in other companies in the tech industrythat are offered through mutual funds in a401(k). A downturn in the industry could not onlyhurt the company's stock, but also other industryholdings, not to mention the increased chance of jobloss for your spouse.

How Much Is Too Much?

Generally, holdings within a single company shouldnever exceed 5% to 10% of your entire investmentholdings. Your spouse's 401(k) may constitute yourentire portfolio, or it might be only a portion of a largerportfolio that also includes IRAs, taxable investments,and other investment vehicles. If the latter is thecase, your spouse's 401(k) might hold more than 15%or 20% in company stock, but it may only constitute10% of your combined overall portfolio.

Some companies match employee plan contributionsonly with company stock instead of cash, thoughthe percentage of companies with this requirement hasdeclined to less than 20%, according to GreenwichAssociates. Nonetheless, your spouse should contributeenough to earn that match even if it is only forcompany stock. Not taking advantage of any company-matching program is like turning down free money.

Remember:

Just make sure that you and your spouse keep yourcombined portfolio varied enough to sustain theworst the markets may bring. Savvy investorsdiversify throughout all asset classes—stocks,bonds, real estate, and 401(k)s.

This article has been produced by the Financial Planning Association (www.fpanet.org), the membership organization for the financial planning community.