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Minimize Company Stock in the 401k

The grey statistics show that may companies continue to purchase their own stock as part of their employees' 401k plans. This can be significantly destructive for the employees themselves, if the price of the stocks fall or the company itself goes bankrupt. In the latter case, the employees will not only lose their jobs, but will also and up with highly unbeneficial retirement plans.

A survey by the Washington Post proves that 50% of the 401k plans of 3 out of every 4 employees are represented by holdings of their own company stocks.

What has caused this trend of continued investment in your company's stocks?

Here are some of the most common delusions regarding holding one's own company stocks as part of the 401k plan:

  1. Contribution matching with company stock

    We strongly support the idea of matching contributions, but we highly recommend it to be matched with stocks different form that of your company.

  2. Loyalty to and faith in the company

    Many employees invest in their company's stocks in order to show their loyalty to the company. They express their faith in the company, but this may come to great losses in the future. Remember that diversification is one of your best friends and follow the example of the successful investors such as Bill Gates who often sells stocks of Microsoft in order to enrich his holdings.

  3. Insider information about the movement of the prices

    Even though employees really know what is going on inside the company and tend to believe that they are able to foresee future changes, they fail to recognize that the price is influenced by many other factors beyond the control of the company.  For instance the company stock price can experience changes due to PR, industry trends, interest rates overall economy, events beyond the control of anyone (natural disasters) to name a few.

Even the mere thought of investing in a single stock is more promising than the investment in your own company's stocks. By staking on your company your current and future financial situation, you take a risk that may be not worth making. Even though your company seems stable and is among the best performance in the field, it is not secured in any way of going out of the business in a later point. By including the company's stocks in your 401k plan you put your current and future financial status in one basket, and kill two birds with one stone.

Your primary strategy should be to diversify as much as possible. Invest no more than 10% of your money in company stocks, but only in case you don't have any other individual stock investments outside your 401k plan. Otherwise, try to decrease the percentage to the lowest degree possible. It is all about gambling, but which can be secured by benefiting from the mutual funds chosen by your company to be included in the 401k plans. Never forget that today's business offers many surprises and traps and only the rational investors manage to face and overcome them successfully.

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