Julie Jason's Your Money: Being loyal to employer's stock has risks

By JULIE JASON November 24. 2017 6:52PM
Traders work on the floor of the New York Stock Exchange (NYSE) in New York, Nov. 20, 2017. (REUTERS/Brendan McDermid)

These headlines tell a story:

April 10, 2015: "GE is a boring stock, but everyone should own it" (MarketWatch)

Feb. 10, 2017: "Why General Electric Company (GE) Is Strictly for Yield" (InvestorPlace)

Oct. 10, 2017: "Why 4 Value Experts Say GE Stock Is Down, But Not Out" (forbes.com)

Oct. 11, 2017: "Cramer on owning GE stock: 'Rarely have I felt this stupid'" (CNBC.com)

Oct. 17, 2017: "Lawsuit alleging General Electric ripped off its workers shows the pitfalls of 401(k) plan" (Los Angeles Times)

Nov. 13, 2017: "GE cuts dividend for second time since Great Depression" (CNN Money)

I'm sharing these for a reason (and it's not whether you should buy, sell or hold GE): I'd like to talk with you about a risk that every employee has when holding the stock of the company that he or she works for.

Even though many people know intuitively that owning one stock is risky, there is something about owning the stock of their employer that makes them complacent. There seems to be an emotional attachment to the stock that is hard to explain but easy to spot. The stock is familiar. Change is not.

Even more important, ownership can be significant. After retiring, employees or their widowed spouses can find themselves with large positions, outweighing other assets by far.

The facts of life are that the stock price of a once financially strong, well-run company with diverse lines of business can drop precipitously for myriad reasons. And if the board needs to change the company's policy to cut the dividend, conservative income-oriented shareholders will flee.

Where does that put you if you have a large position in that stock, even though it is a company you know well and admire? What happens to your nest egg?

No matter how familiar you are with your employer and how much you like the stock, if it is your largest holding, you are living with unnecessary risk. If you are retired, the risk is hard to justify.

To address that concern, I'm a believer in prudent diversification.

How to diversify will flow from an assessment of your overall financial situation, investment objectives, risk profile and investment horizon - a highly personal exercise that you'll want to undertake either on your own (if you are a do-it-yourself investor) or with your financial adviser.

You also will have to consider taxes. When you acquire stock over a long working career, it is highly likely that you are holding low-cost-basis stock. If you own employer stock through your 401(k), you'll need tax advice. (In some cases, you might be able to save taxes by taking advantage of NUA - net unrealized appreciation - rules.)

Review your holdings with your accountant to calculate your potential tax liability if you sell all or some of the stock (consider 25 percent, 50 percent, 75 percent or 100 percent).

After making the decision to diversify and figuring taxes, some accountants I know suggest selling a portion of a large position over a number of years to spread out the tax bite. That can make sense in some situations. In others, the risk of continuing to hold the stock over a number of years needs to be weighed against the increased tax bill.

Moving out of a familiar relationship with your company stock is not easy. Inertia can take over. Prudence dictates taking a close look at whether it pays to lower the amount of employer stock you own, especially if you have a lot of it and, even more so, if you are approaching retirement.

Julie Jason, JD, LLM, a personal money manager at Jackson, Grant of Stamford, Conn., and award-winning author, welcomes questions and comments to readers@juliejason.com.

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