as the subject line states, my 401k is entirely in employer stock. the question goes, what are some strategies for minimizing or controlling risk?
a short background is in order: since starting my 401k, the employer stock has gone up, down, up, down, to the point that I stopped reading any news, stocks, tickers, as I felt it would be too overwhelming to follow it with the emotional turmoil of being wealthy one day and poor the next
the stock itself has split multiple times, even triple-split and with proceeds and reinvestments has done over a 10yr period over 15%, so am not complaining
my understanding is that it is meaningless to try to time a 401k funds transfer to an up-tick day vs. down-tick as I really have to effective trade day control of when funds are transferred over to some money market type portion of the 401k
It is difficult to understand company management that would present company stock as the only investment option in a 401K. This is in fact so puzzling that I wonder if something is missing from your original presentation. For example, is the company stock a company contribution to the plan or are they saying that your contribution of your hard earned money can only be invested in the stock of your company?
To answer your question, the way to manage risk in this plan, if indeed it is true that your only investment option is stock in one company, is not to participate, at least in my opinion.
I can't find it easily, but I recall rules post-Enron that prohibited an employer from forcing plan participant to invest their own money in only company stock. Further, matching money that was used to purchase stock had to have a time limit, after which it can be diversified out. A
401(k) plan is not allowed to have no other options. They may be high expense choices, and not a great plan, but a 401(k) cannot be set up with no other choices.
On a lighter note, I advised a client to use his ESPP (employee stock purchase plan) to but stock at a discount, I advised that to avoid the slight risk of the stock crashing before hitting the account (about a 5 day wait) that a short position be set up in an outside account the moment the stock was priced for purchase. I was told the company prohibited any 'short' position and all option trading whether puts or calls. So the use of puts here, while prudent, may not be allowed.
I like your idea. How can a company prohibit what the employee does in an external, individual account? I mean, they couldn't prohibit an employee from buying a competitors stock, or shorting a competitor's stock as a proxy for shorting their own stock? (Maybe there are certain laws that regulate what designated "insiders" can do, such as corporate officers).
All conventional wisdom strongly discourages investing 401k in your own company stock (or any one company).
Your strategy is simple: every month, exchange about 10% of your company stock into some diversified fund(s). Within a year, you'll have diversified your 401k.
no, see other replies in thread. that was my choice as I didn't know how the other funds would do as they are non-descipt, generic names, no ticker symbols
Bucky I jumped to the same (incorrect) conclusion from the OPs post. He apparently does have other choices, and is choosing 100% employer stock. Sadly, until he does some homework (contact his HR, the Custodian, etc.) and can tell us what those other choices are, we can't help much.
not to a an IRA but to other funds within same 401k
if you read the entire thread, I did mention there are choices, the other choices are non-descript names of funds like target 2015, target 2020. (etc). international equity, diversified bond and such but there is no real information behind these names and no ticker symbols
so, my instinct now, not knowledge not research, is to slowly move some chunks to diversified bond, international equity, target something etc.. as I don't know how long the company stock will remain at current level
what I don't know, is there some strategy in moving the entire 100% or should it be done in small amounts as it's hard to figure the movement of the company stock being up or down one day to the next, or not worry about such detail at all and just keep moving (as suggested in another reply) about 10% each month to some other fund or funds
also, does that mean it's smart to not have anything in the company stock or no more than 10% of entire portfolio?
You might still be able to glean some information by finding out what company manages the 401(k). If your employer publishes past performance figures for the fund options, you can compare those figures with corresponding figures from that company's funds in similar asset categories. If you get a close match, you might have identified it.
Alternatively, perhaps they have some more detailed plan literature that they can send you.
Not only can they send you the required information, they are required by law to do so, and if this material has not been forthcoming, something is seriously rotten in Denmark.
No... it would not make sense to put 20% into target 2010 and 20% into target 2050...
You do want a mix of funds (the mix is called asset allocation). There is not one correct mix. If you go to a website like T Rowe Price (or fidelity or vanguard), and go to education link, and follow links for "how to get started", you should find the information helpful to the root cause of your original post. I am most familiar with choices from T Rowe Price.
The getting started quiz will ask you questions. How long until retirement, how much you have saved, tax brackets and how much risk are you comfortable taking.
The answer will be "% equity-%bonds"
A 100% equity portfolio is aggressive. Could expect a 9-11% annual return. An 80-20 portfolio is moderately aggressive. Could expect a 7-9% annual return. A 60-40 portfolio is moderate growth. Could expect a 5-8% annual return.
In all 3 cases, the % equity would be split between %large caps, % mid caps, % small caps, % international. In the last two cases, the % bonds would be split between government bonds, money markets, foreign bonds and corporate bonds.
There is not one correct answer for asset allocation. My allocation is 100% equity, 75% domestic equity and 25% foreign equity. The overall allocation I shoot for in my 401k is
45% domestic large cap
15% domestic mid cap
15% domestic small cap
15% international large cap
10% international small cap
You allocation might be similar, might be different. This allocation is the basis for much of my investment decisions and suggests exactly what risks I am taking. I am 34 yo and 20-30 years from retirement. A person with same age and more saved might invest more moderately, a person the same age with more risk tolerance might invest more aggressively as well.
Asset allocation is not an exact science, but it would be a good place for you to start.
It's OK to invest in company stock. Depends if/what you hold in IRAs, and what the overall percentages are.
My wife's company does well, and she has a 69% return on her company stock. It is 10% of her 401k contribution. We have my 401k, two rollover IRAs and two Roth IRAs which are invested with less risk, and the other 90% of my wife's 401k is also diversified.
as far as I know, we also have a rule on the 401k, similar to that and the way it works, the company will not match my 3% before-tax and place their 3% into the company stock account, they will only put 10% of the matching money into the company stock and if I have no other funds, they pick something else and place the remaining 90% of their 3% match into that something else
if I were to have no more than 10% of all my 401k money in the company stock, they they would still only place 10% of the matching 3% into that fund.
now, they can't force me to move the money out since I had this 401k for quite a number of years but I am of course looking for an alternative (see the original post for reason "why I am not complaining..")
So what company manages your 401K? These funds are probably offered by that company. You should be able to get some performance data from the company managing these funds.
One quick question, are these funds no load funds?
In general yes. It would be best to diversify your holdings. But a large part does depend on what these funds are and how have they done.
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