Dividends4Life: My Dirty Little Secret

My Dirty Little Secret

Posted by D4L | Thursday, February 28, 2008 | | 6 comments »

What is your single largest asset?

For some reason having my house referred to as "my single largest asset" always grated me. I guess it was because the people that made that statement usually were trying to sell me something I really didn't want.

When one of my holdings finally exceeded the value of my house, I took great pleasure in that. However, this holding kept growing and growing and I couldn't do anything about it. Normally, that would be a good thing, but not necessarily in this case. That holding was my employer's company stock.

I have never purchased a single share of my company's stock. I have accumulated it through my company's 401(k) matching contribution and long-term incentive awards (stock options, performance shares, restricted stock, etc.) Below are the percentages of my company's stock to my total portfolio for the last five years (at December 31st):

  • 2003 35%
  • 2004 32%
  • 2005 40%
  • 2006 46%
  • 2007 42%
Early 2007 my company's stock hit its all-time high. Applying that price to my year-end portfolio the percentage would have been 55%! I don't have the data to verify, but I suspect the percentage may have been higher earlier in the year. My current weighting is 44%. Even though my company's share price has declined since 12/31/2007, this was more than offset by several layers of stock options vesting on 1/1/2008 and last week's issuance of performance shares.

How did I get in this situation? Below are the circumstances that led me here:
  • Until a few years ago, employees were not allowed to move their 401(k) company-match out of company stock.
  • Given my position in the company and access to material non-public information, I am considered an insider, thus I can only trade in legally prescribed windows (usually four per year).
  • For much of the last five years I was prohibited from trading during these window due to being in possession of material non-public information relating to acquisitions and divestitures.
  • Greed and inertia. My company's stock usually outperforms the S&P, I had become complacent in letting it grow over the years unchecked.
As noted in the Bankrate.com article "Too much company stock in your portfolio?" most experts recommend having no more than 15-25% of your company's stock as a percentage of your total portfolio. What am I going to do about this?

I spent 20+ years getting into this situation. Here is my 5-year plan for correcting it. I plan to systematically lower my exposure to my company's stock to these target percentages:
  • 2008 40%
  • 2009 35%
  • 2010 30%
  • 2011 25%
  • 2012 20%
While my trading window is open, I will take my first step today and take 1/4th of what is needed to get me to a 40% allocation by year-end. I will continue to do this each quarter until year-end.

I am curious, what percent of your total portfolio is your company's stock?


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6 comments

  1. Monevator // March 1, 2008 at 6:20 AM

    I've no company stock currently... the only time I was ever given any, the company went bust in the dotcom days... Needless to say that's a warning.

    People who would never put even 10% of their wealth in one listed stock happily ignore it when they do the same with their options and so forth, but it often comes back to bite them. Good luck with the divestment plan!

  2. Adventures In Money Making // April 5, 2008 at 2:20 PM

    I think thats a great "problem" to have!

    are you planning on diversifying out of your company's stock?

  3. Dividends4Life // April 5, 2008 at 8:57 PM

    AIMM: Yes, I have initiated a 5-year plan that will get me down to 20%. I'll be 50 then and may choose to continue reducing it by a % each year.

    Best Wishes,
    D4L

  4. Joe // November 12, 2009 at 2:03 PM

    I wouldn't hold company stock.

    Think about it this way. Your third biggest asset is your labor. Take your salary and think about what somebody would pay to get access to it for the rest of your life. (Simply assume a PE ratio that is the same as your company's stock). That's the monetary value of your labor. Now if your company does well, they may have to hire more employees, give you more responsibility and a raise. If it does poorly they'll cut your salary or fire you. Your salary is heavily tied to the fortunes of your company, thus any amount of company stock decreases the diversity of your portfolio.

    The only situation in which you'd like to hold company stock is if you'd like to be on the executive board or the board of directors. That means you believe in the company wholeheartedly and owning the company becomes your job.

    Otherwise, I'd get rid of the shares in your company over the course of two years.

    Good Luck!

  5. Anonymous // February 21, 2010 at 12:42 AM

    As a very informed investor, I am suprised to see that you have not divested this stock already. It is EXTREMELY dangerous to have more than 10% of your portfolio in any one stock. Ideally, research shows that one should not have more than 5% in any one stock, Please divest out of this ASAP to at least 10% or less of the portfolio!!!!!!!!!!!!!! Worldcom anybody?????????????

  6. Dividends4Life // February 23, 2010 at 6:41 AM

    Anon: I corrected the situation last year. You can see an update at this link:

    http://dividendsvalue.com/5546/2009-q4-progress-review/

    Best Wishes,
    D4L

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