The case for not investing in your own company

For a lot of people out there, being invested in the company they work for comes naturally. It is after all a known quantity. Of all the investments out there, the one you can know the most about is the place you work. You know whether things are on the right track, if the products or services being offered are selling, if the company is looking to grow, what the morale is like etc. Additionally, a lot of organisations will offer employee stock options so that is one way you find yourself wandering into the "self-invested" realm. As an added perk, your organisation might offer employee stock purchase plans where you have the opportunity to buy stock in the company at anywhere from 5 to 15% off market value. It is like getting a free and guaranteed 15% return. And then of course we have the corporate pension / retirement plans where a good chunk of the funds are invested in the company itself. Is this a good thing?

I say not. And I have just one main reason ... Diversification

1. Talk to any financial adviser and the need to diversify ones investments is front and centre. This really takes a back seat when investing in the company we work for. We are already heavily dependent on the success of the company thanks to our pay-check. If your company does poorly, the risk of losing your job or worse the company itself disappearing heavily impacts your net worth because the prime source of your investing dollars is now gone. Add to that the risk that your already invested $$ could also be going down in flames. That is not a pretty scenario. Ask all those Enron and Nortel employees.

One does not have a choice with respect to stock options so there is no escaping them. Once they vest, I would simply cash them out (even if the company is doing great) and take the money elsewhere.

Same goes for the stock purchase plan. Take the shares at 15% off market price and sell them as soon as you can and pocket your 15% growth. The program forces you to save which is always a good benefit and gives you a 15% return ... can hardly complain about that.

For the retirement plans, if you have the option, try investing in balanced funds. Nothing worse than seeing your job gone and your company disappear and then checking your retirement account to see that its balance has dwindled as well because most of the money was invested in the company itself.

Of course there are always going to be cases where people come out millionaires because they stayed up to their eye-balls in the company they worked for. But for every such person there are tons others that lost everything. The idea is to reduce risk. And with risk reduction comes some level of reward reduction as well. So you won't become a multi-millionaire this way but if your company flames out and disappears, you won't find yourself on the street as well.