Company stock, especially if it was awarded as part of a long term incentive package, can be a terrific way to build wealth. But it can be a double-edged sword, too. Over-concentration in a single stock probably represents one of the biggest mistakes we have seen retirees make. And when the stock is from the company where they built their career, they may have a strong emotional attachment that can cloud judgement.
Such over-reliance and over-confidence can be nearly fatal to your retirement plans and dreams when an investor rides a single stock up, and then back down again (remember Enron and Worldcom?).
I recently had a client with more than 50% of his net worth in his company stock. He understood this risk and wanted to enter retirement without staking his financial future on a single stock. So we put together a three-pronged plan:
- We sold some of the stock to create a portfolio that would be more diversified and produce better income. We spread out the sales over a period of time to reduce his taxes
- We used the stock with the lowest cost basis to fund charitable giving. This was important part of the legacy he wanted to leave.
- We retained a much smaller, more reasonable number of shares because he believed it might continue to appreciate. But, we agreed to watch it carefully and trigger additional sales if fundamentals changed.