Money Matters - NPX Newsletter Summer 2018

Why You Should "Just Say No" to Company Stock 

By NPX Member, Renee Bonsell, R.Ph., PharmD

As a pharmacist turned financial planner, I’ve experienced firsthand many of the financial obstacles and challenges that my clients are now facing. Through my company, Pharmacist Wealth, I’ve had the pleasure of helping hundreds of pharmacists across the country achieve financial success and navigate the complex economic decisions that are unique to our profession. From managing student loans, to selecting employee benefits, to purchasing disability insurance and maximizing tax deductions, there seems to be a shared set of questions that we’ve all had throughout our careers. Fortunately, we can easily turn to an insurance agent, tax accountant, or HR representative to answer most of these. But when our questions are investment related, namely whether or not we should buy company stock from our employer, it can be difficult to find a trusted professional to confide in. For example, if we turn to an investment broker, he or she is just as likely to sell us a product as they are to provide us with unbiased advice. And if we ask a representative from our own company, we’ll probably hear stories about what it means to be a “team player” and believe in our company. After all, the corporate executives are probably invested heavily in company stock, so we should be too, right? Well, not exactly.

If you’re considering buying stock in the company where you work, I caution you to think twice. Buying company stock can be harmful to your financial plan because it makes you susceptible to certain risks that you may not have been aware of, such as business risk, financial risk, and

management risk. Along with these increased risks, there are two additional reasons why it’s best to “just say no” to company stock.

The first reason is what I call a lack of portfolio diversification. Assuming that you’re like most of us and graduated from pharmacy school with a large student loan bill, then you likely have limited access to investment dollars. Therefore, achieving portfolio diversification should be your primary goal. Portfolio diversification means investing in different stocks, in different segments of the economy, in different economies of the world. As diversification increases, the overall risk of your investment portfolio decreases. But when you use your limited investment dollars to purchase company stock, you’re not achieving diversification unless you’re also adding another stock or mutual fund to your portfolio at the same time. This rarely happens because company stock is often purchased automatically through an employer-provided plan, but you may not be enrolled in a similar plan to buy other stocks for your portfolio. Being over-concentrated in just one stock exposes your portfolio to the aforementioned risks that could otherwise be diversified away.

The second reason why you should avoid buying company stock is what I refer to as a lack of risk diversification. The principal of risk diversification says that if you’re already dependent on your employer for a paycheck, then you should avoid becoming dependent on them for the performance of your investments, too. Think what would happen if you were heavily invested in company stock and your company suddenly went out of business. You would not only be out of a job, but your investments would be wiped out, as well. Think it can’t happen? Just remember Theranos, WorldCom, Bear Stearns, and Lehman Brothers, and how their employees must have felt when their companies suddenly went under.

Although a strong case can be made against buying company stock, there are limited circumstances when it does, in fact, make sense to purchase the stock. For example, if you can buy shares at a deep discount from the market price (20% or greater), then the discount may be enough to offset the increased risks. Or, if your company stock fulfills a specific need in your portfolio that can’t otherwise be met, then it may be advisable to buy the stock. For example, if you work for an international biotech company and your portfolio needs a large-cap growth stock for diversification, then it may be beneficial to purchase the stock if you can’t find a suitable alternative elsewhere. But even in these unique situations, I still caution against investing more than 5% of your total portfolio in company stock.

After weighing the factors, be sure to make the decision that best aligns with your values and long-term goals. Don’t be influenced by your peers, and, above all, don’t worry about being labeled as a “disloyal employee.” Remember, these are your investment dollars and will serve as the route by which you plan for your children’s college education, fund your retirement, help to fund the future care of aging parents and, most importantly, discover how to live the life you’ve always dreamed of living.

Renee Bonsell is the founder and CEO of Pharmacist Wealth, a fee-only financial planning firm serving pharmacists across the country. For more information, visit www.pharmacistwealth.com.