Betting on the home team: how much to invest in employer stock

Is your employer’s stock your best option?

Mitchell Barr, Client Associate

Chicago CubsAnyone who knows me knows I’m a die-hard Chicago Cubs fan. Needless to say, 2016 was a pretty great year to be a Cubs fan and yes we will continue to brag about it until a new champion is crowned. My colleague Norm gives me a hard time because I use “we” instead of “they” when I talk about the team, as if I’m a contributing member. A lot of hardcore sports fans think this way. We yell at the television and pace around the room as if we are on the field during every game. We believe that our team has a chance to be champion before every season, even when outsiders can clearly see that the team is destined for mediocrity. And we refuse to throw away our lucky hat even though it’s 10 years old and so faded you can’t distinguish the original color.

In general, sports fans exhibit some pretty irrational behavior … until you take a closer look. We yell at the television because we feel like we have some sort of control over the outcome. We sometimes overestimate our team because the only thing we listen to is the hometown sports talk radio station. And if you tried to buy my lucky Cubs hat, I would ask for a billion dollars even though I might get two dollars from Goodwill because it’s my lucky Cubs hat. All of these irrational behaviors are actually well known behavioral foibles. We often suffer from an Illusion of Control that causes our brain to overestimate our ability to control events1. We can exercise Selective Attention to only perceive information that we want to perceive2. And we succumb to the Endowment Effect by which we ascribe more value to things we own than they are actually worth3.

In the financial world, the home team is your employer. If you work for a public company you will undoubtedly receive some employer stock because they hand it out like candy. This compensation structure was started by companies to incentivize employees to perform. If you do well the company does well and everyone wins. If you work for a large tech company and the stock is going through the roof, it can be tempting to load up, but most people hold too much employer stock for the same reasons that sports fans seem crazy.

I hate to break it to you, but your performance at work doesn’t have much of an effect on your employer’s stock price. Even CEOs can’t control the stock market, and catastrophic events can happen to even the best companies (see Volkswagen, Toshiba, Chipotle, etc.). Yet, you probably think your employer stock is way less risky than it really is. Companies never write letters in their annual report talking about how dismal the outlook is for the future. You hear much more positive news about your employer than negative news, which actually causes you to have a more positive outlook for the stock. Even when it is performing poorly, you will keep faith that the company is undervalued and that good times are coming, because it’s your company and you know it’s worth more than the market price.

Employer stock can be an awesome thing, especially if you do work for a great company, but it’s a big mistake to underestimate the risks of concentrating your paychecks and your retirement into a single company. Instead of taking your boss’s word for it, do some research on your employer’s financials and look for independent analysis outside your company (even if it’s just Yahoo Finance) so you can make an informed decision. You don’t want your financial future to be on the line when the home team is on a losing streak. Take it from a fan base that waited 108 years.

  1. Langer, E. J. (1975). The illusion of control. Journal of personality and social psychology32(2), 311.
  2. http://www.theinvisiblegorilla.com/videos.html
  3. Kahneman, D., Knetsch, J. L., & Thaler, R. H. (1991). Anomalies: The endowment effect, loss aversion, and status quo bias. The journal of economic perspectives5(1), 193-206.

 

Mitchell Barr

Client Associate

Mitch writes the popular blog, The Money Monkey, where he focuses on common mental mistakes made by investors, how to avoid being your own worst financial enemy, and thinking about investing in new ways.

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