Blogs > Your Money

Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Saturday, May 8, 2010

Advice That Still Makes Sense

Some years prior to the 2000 stock market plunge, Dave had an opportunity to participate in an offsite meeting for General Electric employees at a golf resort in Northern Michigan. Most of the meeting was focused on business issues but part of the session also covered employee personnel and benefit issues.

Dave’s brother, an attorney, gave a talk on basic estate planning issues and Dave gave an overview on basic financial planning issues. One of the presentation slides talked about a number of financial pitfalls to avoid. One that we always include in such presentations, is that one should avoid accumulating too much of their employer’s stock.

There are a number of good, solid reasons for this advice. First of all, it is not wise to too own much of any one stock. Ideally, we recommend that our clients keep holdings to less than 5% of their investment portfolio value. This limits the impact of company-specific problems on the overall portfolio. We’ve all seen stocks plunge 50% in a short period of time for a variety of unexpected reasons. If your holding is no more than five percent, then a 50% drop in value results in a 2.5% hit to your total portfolio.

Another reason for avoiding too much of your company stock is that when companies experience hard times, it’s often during severe recessions. Tough times lead to layoffs and early retirements. If you happen to be on the layoff or early retirement list you’ll need all the resources you can muster. Your company’s stock value will most assuredly be depressed. Minimizing your company stock holdings will position you to better cope with your possible loss of employment.

As for the presentation to the GE employees, Dave’s advice was poorly received. At the time, GE had a long history of stellar earnings and rising stock price. Who could imagine anything else? A GE Vice President, at a subsequent presentation of the entire group, made a somewhat snide comment about the advice. You could probably bet that no one paid any attention to the recommendation.

A recent article we read (we don’t recall the title or source) questioned whether GE could resume its solid, consistent growth of the past. On March 4, 2009, GE’s stock closed at an unbelievably low of $6.69. It’s currently trading in the $18.00 to $19.00 range, still significantly below its past highs. The article pointed out that GE had layed off a substantial number of its employees. This is one such example of the risk of being too concentrated in your employer’s stock. Too many eggs in one basket, more often than not, ultimately leads to problems. Don’t let your employer stock holding get too high – you may very well regret it.


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