How much is too much?

Given recent news events about employees and employers funding retirement plans with company stock, many people are seeking guidance on just how much of their profit sharing or 401(k) balances should be comprised of their company’s stock.

First, investors should realize that in many cases, 100 percent of their livelihood is already dependent on the company for whom they work. Consequently, employees should look for ways to diversify their assets and future sources of income, which is what their retirement plan represents.

Frequently, companies match employee retirement contributions with company stock or allow a discount in the price at which company stock is purchased if made within the company’s plan. In such instances, the employee still has discretion over remaining contributions and could allocate or direct such contributions to asset classes different from their company.

For example, assume the company for whom you work is smaller than the typical Fortune 500 company, has not been around for decades, or is in a developing industry. Your personal 401(k) contributions could be allocated to complementary industries, more conservative investment styles, or asset classes.

Even if the company for which you work and purchase stock is large or has an established history, holding a concentrated position in a single stock carries greater than average risk. While more detailed methods of portfolio management are available and should be employed, for simplicity, I often suggest a rule of thumb to help people manage their portfolios.

This rule of thumb I will refer to as my “Rule of Ten.” No matter how much you like a company or a particular stock, never let a single position become more than 10 percent of your portfolio. If you have been fortunate to have had it increase significantly, trim it back. Pick a time frame, and sell 10 percent a month or a quarter until it’s a reasonable percent of your overall portfolio.

While these are not glamorous strategies, they are what getting ahead in the long run is all about. Wealth is accumulated over time, not overnight, and proper portfolio management over all your assets, personal and retirement, can be key to helping you achieve your goals.

Scott Butera is a Financial Consultant with Salomon Smith Barney. Salomon Smith Barney does not provide tax or legal advice. Please consult your tax and/or legal advisor.Questions are encouraged at 543-0316 or at scott.m.butera@rssmb.com.

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