Since I am intimately familiar with my employer, I have a sizable amount of my employer’s stock in my retirement account.
This is a serious myth that traps more investors than you’d think. If you’re a hands-off investor, you may be tempted to “go with the flow.” When it comes to employer stock, this is one area where it pays to be hands-on!
Ignorance is one explanation. Many people just don’t know better or know that they can change their allocation. It is not your employer’s responsibility to ensure that your asset allocation is appropriate for your needs. In fact, your employer may have an incentive to keep you ignorant since the more their employees buy public company stock, the greater the potential return of the stock price. The better the stock performs the larger their salaries and bonuses.
The other explanation I often hear is that investing is scary and that it is the same as gambling. Intelligent investing doesn’t have to be scary and it most certainly doesn’t have to be a gamble. The dangers of investing in your employer’s stock are fourfold:
1. Lack of diversification. Investing in individual stocks is a bad idea. By doing so, you are subjecting yourself to avoidable risk and greater chances of incurring losses for a large part of your portfolio.
2. When it rains, it pours. If your employer’s industry falters, as did real estate in the late 1980’s and technology in the early 2000’s, you could be hit with a double whammy.
3. Lack of rational perspective. When you are too close to a subject, you lose the ability to think rationally. You may think the company is strong and innovative when it is actually average or an under performer.
4. Cognitive dissonance. Cognitive dissonance is the feeling of psychological discomfort created by having two competing thoughts. When this state of dissonance exists, our natural tendency is to disregard the negative news and reinforce our existing position. By dismissing the competing thought, we create a sense of cognitive harmony again.
If you get up every morning, drive to the office and put in a full work day, you justify this behavior by thinking the company is good and that you are making a difference. If you invest in the company and you read negative, albeit true, reports about your employer, cognitive dissonance theory tells us it will be very difficult for you to sell your company stock. Instead, you might be inclined to dismiss the report as untrue, biased, or even fabricated in order to maintain cognitive harmony.

Overcoming the Myth: If you are a participant in your employer’s defined contribution retirement plan (e.g., profit sharing, 401k), bring a copy of the latest account statement to your human resources department. Ask them if you own any company stock in your retirement plan. If you do, ask them if you can sell it and if there are any negative financial consequences of selling. If there are not, immediately sell the stock and replace it with a Lifecycle fund or index funds that are appropriate for your retirement timeframe.