Local executives and brothers Kevin and Scott Plank sold $12 million of Under Armour stock recently. Was this good personal financial planning or simply taking advantage of an increasing stock price? Probably both but for the most part it's good personal financial planning to diversify your personal new worth away from the stock in the company for which you work.
Case in point, Constellation Energy and it's employees. Back in late 2007 and early 2008 CEG stock was flying high and reached $100 per share. Employees were cheering the performance of the stock price and calculating early retirement. You see, Constelation Energy matched employee 401k contributions with employee stock. Many employees found themselves with 30-50% of their 401k invested in CEG stock and unfortunately did nothing about it because emotion took over and why not, the stock price was going up every day. We know that does not last forever. That was until the credit crisis of 2008. On September 12, 2008 CEG stock closed at $58.37 per share already down from over $100, by September 19, 2008 the stock was at $25.76. From $100 to $25.76 in about eight months.
The lessen learned is to be diversified. Diversification helps mitigate risk. Inherent in any job is risk that the employer will terminate you or that your salary will be cut or the company will go out of business. Tying up your retirement savings in company stock only increases the risk to your personal financial plan.
It comes to mind that there are more public companies in the area that offer employee stock purchase plans and stock ownership and options in and out of a company 401k. Some include Bill Me Later (an eBay company), Lockheed Martin, Northrup Grumman, Stanley Black and Decker, Legg Mason, Under Armour and many others.
The leadership shown by the Plank brothers is prudent and sound advice that should be considered in your own financial plan. We typically recommend clients have no more than 10% of their net worth in company stock. There are always exceptions but this is a good rule of thumb and a starting point for discussions as it relates to personal financial planning.
If you have more than 10% of your net worth in company stock, either in a 401k or otherwise, it's best to consult with your financial advisor and determine a plan and course of action to understand if diversifing your portfolio will help mitigate risk. Remember the lessons learned from Contellation Energy.
Tom Taylor, CPA is a fee-only, independent Financial Planner and Certified Public Accountant and can be contacted at Chesapeake Financial Advisors or Taylor & Company in Towson, MD. Tom believes that the greatest benefit of planning includes incorporating tax planning with financial planning. Tom’s clients receive both services in one advisor. He is a member of NAPFA and the MACPA and AICPA.