We have a client, Sandra, whose employer was in the process of being purchased by another company. As a function of her position, she was offered the opportunity to buy shares in the new company. She wanted to know if it was a good idea.
Some personal finance experts will tell you to never do that. At the same time, I have clients that bought shares in their privately held employer as they had the opportunity and it turned out very well for them. So we look at it on a case by case basis.
Here are some of the dynamics we consider:
- Is the company publicly or privately held?
- Can you purchase at a discount? How soon can you turn around and sell?
- Are the shares liquid? When, how, and to whom can you sell? What other restrictions are there?
- How is the value of the shares determined? How often are they priced?
After considering these questions you may determine you’d like to acquire shares. However, we strongly discourage concentration. This means that the shares of your employer should only be a portion of your overall investment portfolio, and a minority one at that. Let this be a cautionary tale: This mistake cost one worker nearly 800000 dollars (cnbc.com).
Sandra wound up purchasing shares in her new employer, but in an amount that was less than 5% of her entire investment nest egg. Is this approach right for you? I don’t know. But an approach you should always consider is to reduce or eliminate concentration risk in your long-term investments. It’s something that I do, and I think you should, too.
Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/ SIPC.
This is a hypothetical situation based on real life examples. Names and circumstances have been changed. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments or strategies may be appropriate for you, consult your advisor prior to investing.