A news item caught my eye today. Yet again, employees are suing their own company (JP Morgan) for allowing them to buy company stock in their 401(k) plan while allegedly hiding known financial risks. This lawsuit is just plain silly, a by-product of the litigious nation we live in. Aside from the fact that their lawsuit has no merit (they really thought they should realize the upside benefit of equities investing with no downside risk???), there are several reasons why employees should simply NOT invest any of their 401(k) funds in their employer’s stock:
- Double Jeopardy – You already draw a salary from this company, and possibly restricted stock, options or other forms of long-term incentives. With your salary and/or bonus tied to the well-being of the company, why would you stack more risk on top of the biggest income risk you already have – your paycheck!?
- Market Efficiency (You’re No Smarter than the Market) – The market has already efficiently priced your company’s stock (here’s the Market Efficiency Argument). Sure, you have an emotional attachment to your company and you may think the stock’s really going to take off. I’ve been down that road and so have millions of other Americans. For every hot biotech or Apple-type company you can cite where investing retirement funds in the stock would have performed well, there are an equal number of complete duds that lost to the market. This is sheer random
- Lack of Diversification – If buying an individual stock in your IRA isn’t a good idea, why would it be in a 401(k)? There are plenty of broad-based index funds which can provide plenty of diversification.
- If Your REALLY Think Your Company is Great – (statistically, your company is just as likely to underperform the market as it is to outperform the market), but if you MUST own your company’s stock, why not just buy it in a separate trading account? Or better yet, if you’re that bullish and the market has underpriced the stock so much, why not just buy stock options in the open market? That would pay off way more than holding the stock itself.
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Do You Invest In Your Company’s Stock?
Why or Why Not?