Avoid These Risky Investment Ideas (5 of 10)

Employer’s Stock: What Traps People

The difference between a good investor and a bad one is how they view employer stocks. For many people they think it’s a good idea to invest in company stock. After all, you get a discount and stocks will encourage you to put more money back into the company. It’s a win-win for both.

The reality is far from that.

Good investors know that about 90 percent of their returns can be explained by how their assets are allocated across their investments. To explain it differently, if you own several types of investments – and they are diversified – the more gains you’ll have in the long term versus investing in a handful of them.

The Dangers Of Employer’s Stock

By all means, it’s not a reason to not invest in employer’s stock. You need to keep in mind a few things. Firstly, it’s smarter to diversify your portfolio, so buying a few stocks won’t hurt you so long as you are diversifying.

The second is that you need to be aware that investing into a company stock will give it money. It’s obvious I know, but your contributions of that stock are going towards the company’s retirement plan. That means your pension, and part of your retirement plan is being exposed to this.

What I’m saying is what if the prices of the stock tank? Or what if the company goes belly up? Not only are you going to lose your job, but you’d probably be out of a retirement plan and your investments would take a hit. Of course, that’s the risk you’ll run in with any business you invest in, but investing into a company you are working for personally is a tougher pill to swallow and is a heavier blow.