INTERNATIONAL SECURITIES AND EQUITIES COMMISSION ISSUES ALERT ON RETIREMENT PORTFOLIOS.
International Securities and Equities Commission is concerned that the percentage of stock in retirement portfolios presents a risk to the average policy holder having surveyed and polled various investors and found that as much as 19% of survey participants were holding almost half of their retirement options tied to the stock of their employer and almost 5% were committed to a level of almost three quarters of their total pension fund.
Our advice to individuals holding a large percentage of company stock in their pension fund should make reference to examples such as WorldCom or Enron. Both companies had significant stock holdings in retirement accounts of their staff and most or nearly all of the employees of both companies would have had to be unaware of what was about to happen.
Losing your job and your retirement fund at the same time is disastrous and although the company that you work at may have solid financials and will potentially be around long after your retirement, International Securities and Equities Commission has seen that every company has the potential to be victim to the credit crisis. Even very defensive stocks have fallen by a large percentage during the current fiscal situation.
What is Your Human Capital? What is your Financial Capital?
It is important to consider the value of your future wages and other income that you are able to collect due to your skill set, experience, education and time left until retirement. This is called human capital and is your investment in yourself when viewed from the point of view of the cost of your education. Financial capital on the other hand refers to the total of your assets.
Investing your human capital and financial capital in your workplace may seem logical if you believe in the company you work for but these two variables act in a dynamic way and as your human capital is depleted your financial capital should be expanding on an ongoing basis and on retirement your financial capital is all and your human capital has been expended. This is theory and assumes that the stock of the company you work for performs well but due to restrictions, lockdowns and other issues many employees of Enron were victim to the loss of a large percentage of their financial capital without any recourse.
What do we Suggest?
International Securities and Equities Commission would advise investors to hold no more than 10 to 15 percent of their investment portfolio in the company that they work for. Dont forget to include mutual funds or other similar investments in this calculation in the case that you work for a blue-chip company since these vehicles are likely to include an element of your company in their composition.
It is also important to make yourself aware of any restrictions that may apply to the sale of your shares. Ironically the times that your stock may have a sale restriction are historically the most volatile times for the stock.
Never forget that investing in the company that you work for should be no different to investing in any company. Do your due diligence and read reports by analysts on their opinions of the company.
Pick a Counter-Cyclical Stock to Invest in.
It may be sensible to diversify the ratio of your human capital to financial capital by investing in a company that is counter-cyclical to the company that you work for.
There are many schools of thought on portfolio diversification but as a rule investors should not have an investment of more than 15 or 20 percent in any individual stock or bond. Diversification will protect your portfolio against events that affect one or two companies only.
Other Warnings From International Securities and Equities Commission