Company's stock going down. What to do?

[skruggie]

What about this scenario -

I keep a roth ira and max out the contributions which is very divirsified. Losing money daily, but that's life in the current stock market.

In my 401k, I have 46% company stock. This is a very well known company that produces movies, tv shows and has theme parks in Florida, to give you an idea of the company I am referencing.

The rest of my 401k is diversified between large cap, small cap and international funds.

Would you recommend removing another 20% of my company stock in my 401k out of the company and into mutual funds?

I also have a 401k match, and it is diversified pretty much the same way - 40% in company stock, and the rest spread across mutual funds.

[sweeps]

Would you recommend removing another 20% of my company stock in my 401k out of the company and into mutual funds?

Yes. I don't care how well you think a company will perform -- it's not wise to have half or even a third of your portfolio invested in that one stock.

This is even more true if the company is your employer.

I wouldn't recommend selling all of it in one shot, you may want to take several months or a few years to whittle down your stake.

[skruggie]

Yes. I don't care how well you think a company will perform -- it's not wise to have half or even a third of your portfolio invested in that one stock.

This is even more true if the company is your employer.

I wouldn't recommend selling all of it in one shot, you may want to take several months or a few years to whittle down your stake.

are you including the company match funds in that percentage as well, or just the initial investment?

[disneysteve]

In my 401k, I have 46% company stock.

What percentage does that represent in your overall portfolio, though? It might be 46% of your 401k but a much smaller part of your total picture.

I agree with Jim that 5-10% in any one company is about the most you should do. Is Disney going to close up anytime soon? I certainly hope not, but if you look back at their history, they've had some pretty rough patches where the stock underperformed for extended periods.

sweeps - I'm not sure that Jim was suggesting that 50% in company stock is necessarily a good thing, but rather that you can rebalance in more than one way. One way is to sell current holdings. That makes a paper loss a real loss. Another way is to rebalance by adjusting future contributions so that the company stock gradually becomes a smaller and smaller part of the portfolio. If you think the prospects are good for the stock to recover, that might be the smarter way to go in the long run.

Jim, if I misread your intent, please jump in and correct me.

[skruggie]

What percentage does that represent in your overall portfolio, though? It might be 46% of your 401k but a much smaller part of your total picture.

I agree with Jim that 5-10% in any one company is about the most you should do. Is Disney going to close up anytime soon? I certainly hope not, but if you look back at their history, they've had some pretty rough patches where the stock underperformed for extended periods.

I would say that compared to my total portfolio - roth ira, traditional ira and 401k, the amount of company stock I have is a much lower percentage than if you just look at my 401k.

My traditional iras are rollovers and are not being contributed to, they are all in mutual funds. My roth that I max out yearly (although to be fair, this is only the second year I have been able to do this) - also divirsified in large cap, small cap, international and technology funds.

As a total breakdown, I am guessing this would put my company stock contributions probably in the realm of 15-20% (if even that) compared to the overall picture.

Do you think this makes a difference in how I should be spreading out my 401k? Or do you think I should still lower the company stock division? I also will be vested in a pension in 4 years but its not clear to me exactly how the pension distribution works.

Agreed that I work for a company that certainly isn't going anywhere soon, and financially is doing very well considering the current economic atompshere, but I am concerned about the long term.

[disneysteve]

As a total breakdown, I am guessing this would put my company stock contributions probably in the realm of 15-20% (if even that) compared to the overall picture.

Do you think this makes a difference in how I should be spreading out my 401k? Or do you think I should still lower the company stock division?

I am concerned about the long term.

I think your last sentence answers your question. If you are concerned about the long term prospects for the stock, do you want to have 20% of your money tied up in that one company?

I wold consider what I said above, rebalancing by adjusting future contributions so that the percentage of company stock gradually drifts downward.

[Like2Plan]

Would you recommend removing another 20% of my company stock in my 401k out of the company and into mutual funds?

I also have a 401k match, and it is diversified pretty much the same way - 40% in company stock, and the rest spread across mutual funds.

Skruggie,
DIS is in a sector that is very sensative to economic downturns and recession--my perception is a sneeze or a crosswise glance can impact the price. . It has not really recovered from its all time high like the overall market has (I believe it was as high as the 120's range in 1998 before it split 3 for 1 and in the low 40's for part of the time in 2000).
With having that large of position in your portfolio, you are taking on more risk. Here is the question you have to ask yourself. Do you think this one stock is going to outperform the overall market in a spectacular way?

[skruggie]

Thanks - Disneysteve & Liketoplan

You are both right, and I'm going to lower my company portion in my 401k.

Although I have learned a lot about personal finance the past couple of years, balancing out portfolio and watching the stock market is still relatively new to me.

At the same time I also have goal to raise my 401k contribution from 15% to 20% over the next year, but I will definetely make sure that it is well balanced in mutual funds and international stock, and not leaning company stock heavy. My goal will be to have my company stock in my 401k to be below 20%.

And to learn more about the stock market in general......

[jIM_Ohio]

DS- you understood my point for the most part.
I agree 50% of retirement in one stock is BAD, but OP was talking about 50% of 401k.
Plus selling anything now realizea a significant loss, and that move will only gain minimal shares of other things because the money it raises is not much.

I would point new contributions to other holdings immediately. I would not sell and realize the loss. The situation we have now is temporary.

[sweeps]

What has happened to a stock in the past is completely irrelevant. Holding on to a stock just because you can't admit to yourself you were holding a loser is a very bad strategy. If the stock is still a loser, you should sell it and buy something with a better outlook.

[disneysteve]

What has happened to a stock in the past is completely irrelevant. Holding on to a stock just because you can't admit to yourself you were holding a loser is a very bad strategy. If the stock is still a loser, you should sell it and buy something with a better outlook.

Very true. But you also shouldn't sell a stock just because it has lost money, especially in the current market. Lots of good, solid companies have seen their share prices plummet. Some will never recover. Others will. If I had to bet (and being a shareholder, I guess I am betting), I'd wager that Disney will recover. Actually, I think it is only down about 8-9% YTD which isn't all that bad considering the overall market.

[jIM_Ohio]

Should be noted there are also GREAT tax advantages for owning company stock in a 401k or rollover.

Stock can be sold and pay capital gains rates even though other 401k/IRA holdings are normally taxed at ordinary income rates (2-3X higher).

[tripods68]

Very true. But you also shouldn't sell a stock just because it has lost money, especially in the current market. Lots of good, solid companies have seen their share prices plummet. Some will never recover. Others will. If I had to bet (and being a shareholder, I guess I am betting), I'd wager that Disney will recover. Actually, I think it is only down about 8-9% YTD which isn't all that bad considering the overall market.

Steve---I would agree in general. But you wouldn't want to apply this rule to all companies. Look at Bear Sterns, WAMU, Wachovia, AIG. Those were the biggest companies yet they all fold. Their employees are now holding worthless stocks except AIG.


Zillionaire,

Be prudent and do not put all your eggs in one basket. You need to study your company's future outlook. What causing the stock to head south? Make a decision based on fundamental beliefs rather basing it on stock price itself. Do you believe in your management? Do they have a long term strategy for growth or expansion? More importantly, do you believe in your company future? If your research proved otherwise, then lessen your stock holdings. Perhaps you might find your company is really in financial trouble. Then start selling. How long do you plan to stay with the company is another factor in your decision. How long do you wait for the stock price to go up again is another factor. Are you searching for other employment outside your own company is another factor to consider. Only you can answer this question, but definitely do your own "due diligence".

[disneysteve]

Very true. But you also shouldn't sell a stock just because it has lost money, especially in the current market. Lots of good, solid companies have seen their share prices plummet. Some will never recover. Others will. If I

Steve---I would agree in general. But you wouldn't want to apply this rule to all companies. Look at Bear Sterns, WAMU, Wachovia, AIG.

I agree completely.

[MYOM]

I agree with everyone that the amount of money invested in company stock should be reduced. If I were your Financial Advisor, I would recommend no more than 10% of your 401k holdings be invested in your company’s stock. In addition, I would suggest you have an exit strategy for all your investments. I don’t want to get in trouble with forum moderators by mentioning a tool I invented so let me recommend a tool I did not invent. $NYSI is very good at helping the investor enter and exit their positions.

Although the indicators I follow have not signaled Buy, I would continue to Dollar Cost Average into my 401K mutual funds.

Good luck to you!

Dan Clemons, author and retired Certified Financial Planner