Many companies still offer company stock in their 401(k)s, although it's becoming less popular. Whether you buy it or receive shares as part of a matching contribution, you might find yourself with a significant position in your employer.
Continue Reading Below
In this situation, you would be wise to think like an entrepreneur and diversify. After all, your job is a big enough risk as it is.
The answer to the question of "why" can be summed up in one word: Enron. It was an extreme case, of course, but Enron illustrated the risk involved in concentrating both your wealth and your income in one place. If the business goes south, you could not only lose your job, but also a lot of value in your shares.
Now, a lot of pundits would recommend keeping no more than 10% to 20% of your shares in company stock; but I think even that's quite a lot. The reason is simple: For every risk you take in life, you have a choice of amplifying it or reducing it.
The risk of working
Most people don't think of their job as representing a risk; but it does. Think about it like an entrepreneur. Say, for example, that you start a widget business. Then you decide to invest all your other assets in that widget business, too.
What if something goes wrong? Now you've lost both your investment and your other wealth.
Continue Reading Below
Having a job might seem more secure than starting a business, but you're still taking a risk. The risk lies in tying your livelihood to a set of executives' management skills while they navigate an industry they don't control.
Even if your managers would never ever fire you no matter what happens, your income level, benefits, and prospects are influenced by what happens at the company. To add company stock to that risk is to magnify it. That's why you should think like an entrepreneur and mitigate the risk instead.
It's all about diversification
You might be thinking that this is a paranoid stance to take, especially if you work for one of the old faithfuls of American corporations. I can understand why -- it doesn't seem like Coca-Cola or Johnson & Johnson are going to go out of business anytime soon.
But diversification is not an entrepreneurial secret; it's the very foundation of investing itself. If you've invested your income in your job, your wealth should be coming from other investments. That way, if one goes south, you at least can be reasonably assured that the other won't follow.
What do I do?
To the extent that you can, diversify away from the company stock. Some employers have restrictions on what you're able to do, but take advantage of whatever tools you have to diversify into other asset classes.
Where should you go? At the very least, I would suggest going out of the industry. For example, if you work for a large domestic company, make sure your portfolio has representatives of small companies and internationals.
You might not get to enjoy the share-price fruits of an industry boom, but you'll at least be able to breathe a sigh of relief should it ever go bust -- or even anywhere close.
The article Think Like an Entrepreneur and Sell Your Company Stock originally appeared on Fool.com.
Anna Wroblewska has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.