Why Company Stock May Be Riskier Than Employees Realize
Stock compensation has its perks, but employees must be realistic (and unemotional) about their investments' prospects. Sometimes strategic sales are smart.


Jim is an executive at a large publicly traded insurance company. As part of his compensation every year, he is granted stock in his company. And, as part of our annual review, we talk about it. How much stock should Jim own? Should he sell it? Gift it? Or keep it?
Often, Jim thinks his company stock has room to grow. I find that is quite common. In my experience, most owners of their company stock tend to believe their stock is above average.
It’s like the classic IQ study where 94% of those questioned believed they were above average … if only. Psychologists call it the “better-than-average effect.”
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.

Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
In my 25 years of advising executives, I have seen the good and bad of clients’ accumulating stock from their employer. For some, the company stock was a good investment. For others, not so much.
If you are like Jim and are paid in company stock, you too might be wondering if this is a good thing. Though everyone’s circumstances differ — each investor has their own unique set of goals, objectives and tax situation, plus the fundamentals of the stock itself — I find there are common points to consider:
1. First, understand the risk
Owning a large amount of any one stock is risky. A question to ask yourself: Is it worth the risk? One measure of risk is the standard deviation of a stock’s price. The standard deviation is the variability in the price of a stock.
Often, the standard deviation is greater for one stock than for a portfolio of diversified stocks. Owning different stocks across different industries tends to decrease the volatility of a portfolio.
In theory, you should be rewarded for the risk of owning one stock, like your employer stock. The more risk, the more reward, right? Well, that’s not always the case.
To find out for yourself, try to compare the three-year, five-year and 10-year standard deviation, or risk, and the return of your company stock to a broad index, such as the S&P 500. Check any of the large financial websites for this information.
You’ll want to know how much more risk you’re taking with your company stock, based on how great its standard deviation is, and then see how well its returns compare to the benchmark index. Past performance is not indicative of future returns; however, it can help put things in perspective.
In other words, you may be less excited about accumulating large amounts of your employer stock if you knew the risk/return tradeoff in the past was not that favorable.
2. Determine how important your employer stock is to your financial security
The more your financial security depends on the performance of your company stock for your retirement, or some other goal like paying for college, the more fragile your financial planning.
One way to test this is to run a scenario analysis. You can start with an online retirement calculator and play with the assumptions.
We run retirement cash flow projections for our clients assuming a base case and several stress tests. The base case assumes the investment portfolio continues to perform.
Then we stress the projections:
- What happens if the client loses his or her job?
- What happens if the company stock drops 20% or 30%?
- What is the impact on the client’s retirement goals?
If there is a substantial impact, such as pushing back the retirement date to an unrealistic age, then the client should be more careful about how much of their company stock to own.
3. Develop a plan
If a client is concerned about the risk of owning too much employer stock, we plan accordingly. I may, for instance, encourage my executive client to set up a planned sale. Here, we schedule in advance how many shares of his or her employer stock to sell and when to sell.
This approach takes the emotions out of selling.
I find most clients tend to think their stock is undervalued and will want to hold on to it, or, if it is doing really well, they want to see it continue to grow.
Either way, personal biases can cloud our objectivity. A planned sale can help. Keep in mind: Corporate insiders will have to get pre-clearance.
There are other strategies. For instance, having an active tax-loss harvesting strategy can help offset the gain when selling employer stock. Or if charitably inclined, consider gifting appreciated employer stock.
You can gift your employer stock to a charitable trust and receive an income stream to help with retirement expenses.
There is no income tax on the gift to the trust, though some of the retirement income received can be taxable. At the end of the trust term, the remaining balance left in the trust goes to the charity. You must be comfortable with gifting the stock, as the gift is largely irrevocable.
I suggest running retirement projections with the gift to see whether you can afford it. Trusts can be complicated and there is a cost to administer them. It’s best to speak to a qualified tax or financial adviser.
The bottom line on company stock
There may be many reasons to own your company stock, but you want to be smart about it. First, know the risk. Having a concentration in any one stock can substantially increase the risk for your whole investment portfolio.
Try stress-testing your retirement projections to see how a large drop in the company stock affects your goals and objectives. If you want to sell the company stock, a planned sale can take the emotions out of selling.
Or if you plan to hold the company stock, ensure you have a balanced portfolio elsewhere to help mitigate the risk. Having an active tax-loss harvesting strategy can help minimize income taxes if and when you decide to sell your appreciated employer stock.
There are other approaches to minimize the risk of owning a large amount of employer stock, and there are many other ways to minimize the taxes when selling your employer stock. As you might have guessed, it all starts with a financial plan.
For more information on creating a plan for your employer stock, please email the author, Michael Aloi at maloi@sfr1.com.
Investment advisory and financial planning services are offered through Summit Financial LLC, a SEC Registered Investment Adviser, 4 Campus Drive, Parsippany, NJ 07054. Tel. 973-285-3600. This material is for your information and guidance and is not intended as legal or tax advice. Clients should make all decisions regarding the tax and legal implications of their investments and plans after consulting with their independent tax or legal advisers. Individual investor portfolios must be constructed based on the individual’s financial resources, investment goals, risk tolerance, investment time horizon, tax situation and other relevant factors. Past performance is not a guarantee of future results. The views and opinions expressed in this article are solely those of the author and should not be attributed to Summit Financial LLC. Summit is not responsible for hyperlinks and any external referenced information found in this article.
Related Content
- Three Steps to Weave Equity Compensation into Your Financial Plan
- What Are the Investment Opportunities and Threats in 2025?
- All About RSUs: How They Work and What You Should Know
- Got Company Stock in Your 401(k)? You Should Know about NUD
- Nine Types of Trusts for High-Net-Worth Estates
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Michael Aloi is a CERTIFIED FINANCIAL PLANNER™ Practitioner and Accredited Wealth Management Advisor℠ with Summit Financial, LLC. With 21 years of experience, Michael specializes in working with executives, professionals and retirees. Since he joined Summit Financial, LLC, Michael has built a process that emphasizes the integration of various facets of financial planning. Supported by a team of in-house estate and income tax specialists, Michael offers his clients coordinated solutions to scattered problems.
-
Stock Market Winners and Losers of the 'Big, Beautiful' Bill
Defense, manufacturing and tech should prosper, while health care and green energy stocks face hurdles.
-
I'm a Financial Planner: Here's How to Invest Like the Wealthy, Even if You Don't Have Millions
Private market investments, once exclusive to the ultra-wealthy and institutions, have become more accessible to individual investors, thanks to regulatory changes and new investment structures.
-
Four Ways a Massive Emergency Fund Can Hurt You More Than It Helps
Saving too much could mean you're missing opportunities to put your money to work. Redirect some of that money toward paying off debt, building retirement funds, fulfilling a dream or investing in higher-growth options.
-
With Buffett Retiring, Should You Invest in a Berkshire Copycat?
Warren Buffett will step down at the end of this year. Should you explore one of a handful of Berkshire Hathaway clones or copycat funds?
-
I'm a Financial Planner: How to Dodge a Retirement Danger You May Not Have Heard About
Timing is everything, and sequence of returns risk can mean the difference between a retirement nest egg that's overflowing … or empty.
-
Caring for Aging Parents: An Expert Guide to Easing the Financial and Emotional Strain
Early conversations, financial planning and understanding the progression of care needs can help to mitigate stress and protect family relationships.
-
Dow Adds 238 Points as UNH, CAT Pop: Stock Market Today
The lack of a September jobs report didn't seem to worry market participants, with the data delayed due to the ongoing government shutdown.
-
I'm a Financial Adviser: The OBBB Is a Reminder for Older People to Have a Long-Term Plan
The new tax bill presents a good opportunity for retirees to revisit tax plans, look into doing some Roth conversions and consider plans for long-term care.