Owning Shares of Your Employer

By Jesse Anderson, CFA,

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Do you own shares of stock in the company you work for? Do they make up your entire 401(k) or just some of your "play money"? I'm amazed at the amount of clients and prospects I meet with that have a significant portion of their portfolio invested in their company's stock. Familiarity and 'insider knowledge' seem to be the top reasons the hold the positions. They quickly forget stock picking is nearly impossible and even those with the greatest level of knowledge get it wrong.

Familiarity bias is investing in what you know, or a business that is visible to you. Investing in the grocery chain down the street always seems better than the West Coast chain you've never heard of. This decision is often made without doing any analysis or evaluation of the fundamentals. What can be more familiar than the place I spend 40 hours each week at? Ask the employees of Lehman Brothers or American Airlines and I doubt any of them expected things to go so wrong so quickly. When things go wrong, your job may be in jeopardy as well as your investment.

"We are busy." Whether the assembly lines are working overtime or the planes are full, these may not tell the entire story. The day-to-day visual appearance of a company is unlikely to be the best indicator of future stock prices. Profit margins, interest payments, and fraud are all difficult to see, yet drastically impact a stock price. Business may be picking up, but that does not mean higher stock prices in the future. It is hard to detect what future outside events might play a part in the value of your company.

Finally, you would think upper management with a perfect view of the company would get these decisions right. A recent study of share repurchase programs in S&P 500 companies by Mckinsey & Company found, "Only 31 percent of the companies earned a positive return from buying back shares-less than you would expect from a random throw of the dice ." Their suggested solution, "companies should give up trying to time the market ." A simple dollar cost averaging approach outperformed the companies' strategies by a median return of between 3 - 4.5%. This is a great example of why dollar cost averaging is a crucial piece to the Snider Investment Method .

Before making any investment, investors should evaluate what is influencing their decision. Is it fear or greed? What behavioral aspects are affecting my decisions: overconfidence, familiarity, or others? Investors need to put together a plan and stick with it . One that is build around sound investment principles and theories, not market timing and familiarity.

The intent of this article is to help expand your financial education. Although the information included may be relevant to your particular situation, it is not meant to be personalized advice. When it comes to investing, insurance and financial planning, it is important to speak to a professional and get advice that is tailored to your unique, individual situation. All investments involve risk including possible loss of principal. Investment objectives, risks and other information are contained in the Snider Investment Method Owner's Manual; read and consider them carefully before investing. More information can be found on our website or by calling 1-888-6SNIDER. Past performance is not indicative of future results.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Personal Finance Retirement
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