With discounted stock options, I’ve got 33% of my portfolio in my company. Is that too much? On this week’s Get Ready For The Future Show, we’re answering YOUR questions! You’ll learn:

✅ Should my wife and I look at Roth conversions?
✅ Is there an upper limit to what I should have in my HSA?
✅ What’s the impact of the 10-year rule for an inherited IRA on my taxes?

All this straight talk and more LIVE, Wednesday at 11:30!🎙️

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❓ Have your own questions? Call or text us at 501.381.5228 or email show@getreadyforthefuture.com. We’re here to help you navigate the journey to true financial independence. See you there!

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Is it bad that 33% of My Portfolio is In My Company?

Investing in one’s company can be a natural inclination for employees, especially if they believe in the potential of their employer’s growth and success. However, it is crucial to consider the risks associated with having a significant portion of your portfolio tied to a single company. In this article, we will analyze the implications of having 33% of one’s portfolio invested in their own company.

Diversification is an important principle in investing. By spreading investments across different assets, industries, and geographic regions, investors can reduce their exposure to any single risk. The rationale behind diversification is that if one investment performs poorly, others may perform well enough to counterbalance the losses.

Having a third of your portfolio invested in a single company could expose you to concentration risk. Concentration risk occurs when the performance of one investment significantly impacts the overall performance of your portfolio. If the company were to face financial difficulties or experience a decline in its stock price, the impact on your portfolio would likely be significant.

To illustrate this, consider a scenario where the company faces a sudden downturn, leading to a sharp decline in its stock price. With 33% of your portfolio tied to this company, your overall portfolio value would also decline significantly, potentially impairing your financial goals.

Furthermore, investing a large portion of your portfolio in a single company could result in limited diversification in other areas. It is essential to have exposure to various asset classes, such as stocks, bonds, and alternative investments, to build a resilient portfolio that can weather different market conditions. By having a substantial allocation in your company, you are effectively limiting your ability to diversify across different sectors and asset classes.

Another consideration is the impact on your financial well-being if your employment were to be affected. Suppose your company faces financial difficulties and needs to downsize or undergoes layoffs, leading to potential job losses. In such a situation, your investment in the company could be at risk simultaneously with your income source. This concentration of risk could significantly impact your overall financial stability.

While it is understandable that employees have confidence in their own company’s growth prospects, it is crucial to strike a balance between loyalty and prudency when it comes to investment decisions. Ideally, no single investment should dominate your portfolio, and diversification should be a key consideration.

One way to mitigate concentration risk is to gradually reduce the percentage of your portfolio invested in your company. As you sell some of your company’s shares, consider reallocating those funds to other investments, thereby spreading your portfolio across different opportunities. This approach allows you to maintain some exposure to your company’s success while reducing the concentration risk associated with having a significant allocation.

Remember, investing is a long-term game, and thoughtful decision-making plays a vital role in building and preserving wealth. Consult with a financial advisor who can help you analyze your portfolio, assess your risk tolerance, and guide you in making informed investment decisions.

In conclusion, while it may be tempting to invest a significant portion of your portfolio in your own company, it is essential to consider the potential risks associated with such a concentration. Diversification is a key principle in investing, and having a large allocation in a single company can expose you to unnecessary risk. Balancing loyalty and prudency is crucial to achieve long-term financial success.