Buying company stock: too many eggs in one basket?

[red92s]

My wife and I are typically well-aligned on financial goals and strategies, but have differing opinions on how to handle investing in company stock.

I work for a small company that is organized as an S-corp that allows employees to purchase stock. Historically it's done very, very well. Since converting to an S-corp in 2003, the share price is up about 450% [average of about 15% annual increase, high of 32%, low of 3%] In addition, it typically pays an annual distribution that has averaged around 25% of the employee share cost [high of 39%, low of 16%]. The stock has never failed to pay an annual distribution, or finished a year at a lower valuation than it began.

I've only been at the company a short time, and currently have ~$10k in company stock. Without touching emergency funds or other savings or investment vehicles, we could come up with another $30k. That money was slated to go into our general long-term investments, which is primarily a Vanguard Admiral-Class 3-fund portfolio. Only debt is the mortgage (26 yrs remaining on a 30 yr, 3.125%, ~$240k remaining, value is ~$400k). Our combined income is in the low $200k range. 2 kids, both in daycare, which is currently a huge hit to the budget (more than the mortgage).

My wife thinks investing additional large chunks of cash into the company stock is putting to many eggs in one basket. I'd normally be right there with her, if it were not for the jaw-dropping returns. We are normally pretty conservative, but the "upside" feels like orders of magnitude greater from when we are normally making these decisions.

[james.hendrickson]

Why not buy company stock AND diversify?

Put half your investing monies into company stock and half into mutual funds.

[rennigade]

What % of all your investments/savings are in company stock? That will tell you your answer.

[StormRichards]

There is a reason this type of disclaimer exists

[red92s]

What % of all your investments/savings are in company stock? That will tell you your answer.

Our current cost basis in company stock is $6k. We've received ~$3,300 in distributions over our 3 years owning shares. Our conservative plan was to purchase another $4k for 2017.

If you summed up all our retirement and non-retirement investment account balances (except established 529 plans for both kids), it'd be around $200k. If you include cash in the total (except emergency savings), it's around $250k.

So, our current stake is around 4-5% percent of our total portfolio depending on how you slice things.

[tripods68]

This sound to good to be true. I'm very skeptical.

[red92s]

This sound to good to be true. I'm very skeptical.

Understandable. But, to clarify, we are a durable goods manufacturer. This isn't like some exotic trading desk or wired insurance brokerage where all the value exists on paper. It's also not a work from home scam I found out about in the comment section of a news article. We make tangible goods, and sell them to real customers. We go from raw material to finished product in house, so we capture a lot of value we create for our customers. It's a profitable business.

[Fishindude77]

Sounds like a sweet deal assuming you have confidence that the company is solid and will be around a while. Will there be a market to sell your shares in the event you eventually want out?

[97guns]

My opinion is to keep pounding the company stock, assuming your buying at a discount. There's no better way to gauge the well being of a company than by working for them, the most genius Wall Street guru would be behind the curve in comparison to what you would know.

[rennigade]

Ok...yea 4%-5% of your net worth isnt going to kill you. If you feel comfortable throw a couple more grand in like you planned. Even if it goes to zero its not going to break the bank.

[Fishindude77]

Good point by 97guns.
As an employee there, you should know how the company is doing and how confident you are that they will remain successful. You also have a hand in directing the company's success with your daily work efforts.

If the confidence levels are there, it wouldn't bother me to have 50% of my portfolio in company stock.

General stock market investing gets promoted heavily here, but there is no guarantee those investments will continue to make money or wouldn't fail, and you have a whole lot less knowledge and control in this area.

[kv968]

Good point by 97guns.
As an employee there, you should know how the company is doing and how confident you are that they will remain successful. You also have a hand in directing the company's success with your daily work efforts.

Those Enron employees must have been VERY confident that they'd remain successful

[james.hendrickson]

Those Enron employees must have been VERY confident that they'd remain successful

KV, thats correct. There is far more risk in holding a concentrated stock position. That said, the data is very clear - high net worth individuals hold concentrated stock positions.

[rennigade]

Good point by 97guns.
As an employee there, you should know how the company is doing and how confident you are that they will remain successful. You also have a hand in directing the company's success with your daily work efforts.

I couldnt disagree more. Unless you're upper upper management...you are far removed from the reality of whats really happening to your company. A fiscal report comes out each year I believe...thats it.

Someone mentioned enron but take any company that ever had layoffs...if employees knew what the hell was going on in the company none of them would ever be surprised if a layoff comes around. How could they be if they are in the know and have a hand in directing the success of the company?

What about the carrier employees who found out their jobs were moving to mexico? Theres a youtube video of their reactions. How come they didnt see that coming? Sure most of the jobs are now staying put because of trump but thats besides the point.

[kv968]

KV, thats correct. There is far more risk in holding a concentrated stock position. That said, the data is very clear - high net worth individuals hold concentrated stock positions.

That may be true as well but I'm sure the data also shows that there are a lot of broke individuals as well holding overly concentrated stock positions.

Dot com bubble kinda comes to mind.