Monday, March 17, 2008

Again don't own company stock

Well on Friday Bear Stearns announced it bankruptcy. This forced the Federal Reserve to convene an emergency meeting, at which they cut interest rates by 1/4 point. And a deal was struck between JP Morgan and Bear Sterns to be acquired with help from the Federal Reserve.

But that's not the bad news. The bad news is that Bear Sterns apparently gave 401k matches and bonuses in the form of company stock. Which much like Enron was great when the stock was $90/share. But at it's current price of $2/share people are in serious trouble.

Granted Bear Stearns is a bank, but wasn't Enron an energy company? Who could have imagined such an implosion? It's a terrible idea to tie up not only your salary but also so much investments in one company. As an individual you are banking on the company doing well so your investments do well, and you keep you job. But then what happens?

I think it's horrible that company give matches in company stock and bonuses. This happened at DH's previous company, which while it's better than nothing, I think is a bad idea.

What happens is people because they work for the company often have black-out dates which they are unable to sell before or after "big announcements." This means they are often forced to hold on to a risky stock even if they wished to sell.

This poses the unfortunate circumstances that you could lose lots of money unwillingly and unintentionally. So should there be rules against it?

I'm not sure. Because on one hand, at least we're getting money from the company. But what it's actually worth is a whole different ballgame. So it's something, but is the 401k or bonus really valuable? Will it cost you money or make you money?

And it stands to reason the company is giving you stock because it's often cheaper than cash, while making you more invested in the company. So there is no downside for them, only the employee.

But the reality is, that the 401k match in company stock or bonus in company stock is horrible, it's still better than nothing. And if you are valuable enought o get a bonus or match, perhaps we shouldn't complain because we still have a JOB!

And right now it seems like it's just barely enough to hang on to the jobs we have.


Jonathan @ Master Your Card said...

$2 a share for a company that was trading at over 50 times that last year... Not a bad deal for ole' JP Morgan!

Cinder said...

While this is a nasty example of what can happen when you do, I don't really agree about not owning *any* company stock, especially in a company you feel secure in your position in. I always suggest no more than 15% of the total balance of your 401k be in company stock however, to minimize negative exposure when things such as these happen (I am not a professional financial advisor).

Living Almost Large said...

15% is way to high for a single stock. Also you already have a your job in the company.

And most would have said Bear Stearns was a "stable" company. It's a bank! Most employees said it was stable.

So I can't say I think it's a good idea exposure wise.

Dreamer said...

I don't have any company stock in my 401k even though I feel like it is a strong stable company that has been in business for 71 years. If the unforseen does happen and the company goes under, like at Bear Stearns, I will just lose my job. I will still have my retirement though.