Investing in Your Own Company's Stock?

NEW YORK (MainStreet)—Buying stock of your company appears to be a logical and easy choice to boost your investment portfolio, but it can be a risky proposition.

Financial planners advise that you limit your exposure and keep your portfolio diversified even though many employees believe they are savvier about the company's business model, products and future earnings.

"Diversification is key," said Jason Roberts, a CRPC and financial advisor in Houston for Ameriprise Financial Services, Inc. "I try to veer people away from it since they are already very tied so heavily to the company, but it depends on their financial goals and time frames."

Employees should not invest more than 10% in their company stock in their 401(k) plan since their livelihood is already tied to the company, he said. In essence, they are already "investors" since their salary and benefits are already linked to the company.

Having a larger investment in the company means you could experience bigger dips in the stock price, which affects the overall performance of your portfolio. Balancing your risk is important.

Previous downturns in the economy have demonstrated how owning too much of your company's stock can nearly wipe out your retirement account. Employees of Enron, WorldCom and Lehman Brothers saw large portions of their retirement portfolio vanish when the companies filed for bankruptcy and later became insolvent. After it was revealed the companies were losing massive amounts of money, employees were not allowed to sell their stock as it dipped drastically.

If the company is matching your stock purchase, it can be worth it to take a second look, but limit your overall exposure to 15% no matter where you are in your career, said John McDonough, president and CEO of the Studemont Group based in The Woodlands, Tex.