Tempting though it may be, it’s an inherently risky move to invest most of your pension in the stock of the company for which you work. Here’s an explanation and an example to consider.
Don’t Keep the Bulk of Your Savings in Shares of the Company for Which You Work
There may be some comfort in investing in your own company. You may have pride in your employer and in your own work. You may feel that you would “know” if there were accounting irregularities or any weakness that threatens the company. You may know your company has a long history of steady growth.
It’s a risky choice.
Having Too Many $$ in the Same Company is Risky
Many people who work in large Canadian companies are offered opportunities to invest directly in the company for which they work. Often, there is a work savings plan that allows employees to buy shares in the company without paying a trading commission. If the company has a defined contribution pension plan, and most now do, one of the investment choices is to buy stock in the company, often with no commissions charged. Depending on the type of employee rewards program, they may be granted SARs or RSUs where the award’s payout is based on the value of the stock on a certain day or during a certain period.
Now imagine where else these employees are putting their savings and retirement money? Chances are good that at least some of it is going into a stock market ETF or mutual fund that includes their own company!
Having so much of your personal monetary worth tied to one company is inherently risky.
Learn from the Disastrous Impact of Nortel’s Collapse on Its Employees’ Pensions
A relative of mine was once employed by Nortel Networks. Like many Nortel employees much of his pension was invested in shares in Nortel. After all, at that time, Nortel was a mini-Bell. It was a secure, stable, growing Canadian corporation. It was even viewed as being largely conservative.
This relative worked for a splinter group in Nortel that the company decided one day to sell off. Part of the terms of sale was that certain of the key employees, including my relative, would move to the new business. Another condition of the sale was that the employees of the new company had to sell off any holdings in Nortel, specifically the ones in their pension plan.
That forced change in pension investments saved my relative thousands of dollars. Because just after he sold, Nortel collapsed.
For those of you too young or otherwise new to the Nortel saga, here’s a quick review. Nortel was a subsidiary of Bell. According to the CBCNews article Key dates in Nortel Networks’ history in 1977 it incorporated. In July 2000, during the dotcom bubble, Nortel’s stock hit a high of $124.50 per share. In 2002, the share price had plunged to 67 cents. It never really recovered. In June 2009 Nortel was delisted from the TSX.
Virtually none of the Nortel employees saw this coming. The collapse was caused, it appears, by two major problems. One, the price of the shares skyrocketed on the same euphoria that swept all high tech companies in the late 1990s, now called the dotcom bubble. The price shot way above the realistic value of the assets and the production of the company. Two, there may have been some actual illegal activity on the part of Nortel management. That is still being decided in the courts. Either way, when the dotcom implosion occurred, Nortel was caught up in the tidal wave and left battered and broken on the beach.
Many Nortel employees lost their jobs. Many of them then realized in horror that their personal savings plans and their retirement plans had been heavily invested directly in Nortel stock. They had lost virtually everything, through no fault of their own, in less than a year. No one saw it coming. No one person could have stopped it.
Don’t let it happen to you. Stay diversified. Doesn’t let most of your worth become invested in only one asset no matter how safe and secure it seems.
Did you ever review your personal investments and realize with a shock that you are over-invested in one company or in one sector? Were you able to fix the problem in time? Please share your experiences with a comment.