That’s just gross, Nelson. What a terrible mental image.
Welcome back, Italics Man. Have I ever mentioned nobody likes you?
Once or twice, yes.
Oh, you’re still here?
There’s no time to waste with more terrible Italics Man jokes, dammit. We have important personal finance issues to discuss, dammit. And then you’re all free to go for pizza, dammit. That last dammit was stretching things a little, but I just can’t help it, dammit. I love the word dammit so much.
I’m sure I’ve mentioned it before, but here’s the Financial Uproar Don’t Crap Where You Eat Rule in a nutshell. If you’re lucky, your employer will offer you the chance to invest in their stock, usually at a nice discount. See, your boss cares!
Many people take advantage of this perk and buy every spare share they can get their hands on. This is a bad strategy, especially if someone doesn’t have much in the way of other assets. Putting all of your eggs in one basket is a bad thing. If the stock falls, your entire net worth goes with it.
But it could get potentially worse. If the stock falls and you lose your job, you’re doubly screwed. Don’t listen to what porn has told you about getting doubly screwed. It sucks. She’s not enjoying herself, fellas.
That’s the Financial Uproar Don’t Crap Where You Eat Rule. Spread your bets, especially when you don’t have that much cash to begin with.
Exceptions to the rule
The rule is a little tricky because there are certain acceptable ways to get around it.
Only a maroon passes up the chance to get succulent guaranteed returns. Sure, buying stock at a 25% discount is hardly guaranteed to lead to riches, but in general you’re not going to screw up too badly by taking advantage of an employer match. Buying assets at firesale prices is a good thing.
So what’s an enterprising young person to do? It’s simple. Take the match and diversify out the stock over time. Cycle money out of the investment into a boring ol’ index fund periodically. You can either do so when the stock bumps against new highs, or create a set schedule to accomplish the same thing. If you pledge to sell some of your stock on each December 1st, for example, it’ll take the market timing aspect out of it. And lord know, y’all suck at market timing. Except me, of course.
Frankly, this part of the Don’t Crap Where You Eat Rule is child’s play. Most everybody with functioning grey matter knows this. Which is why we’re going to kick it up a notch.
Extending the rule
Let’s take this rule a step further. Here’s why you should avoid investing in the same sector as your job.
Often, a stock goes down because of management ineptitude. Some wannabe Steve Jobs bets the future on some new finangled gadget and the whole thing goes down the toilet. And then he gets fired and collects a massive payday while heading out the door. Isn’t capitalism fun, kids?
But perhaps more often a company’s stock price isn’t necessarily in their control. Your company might depend on debt to expand operations. Rates go up and the stock gets hit. Competitors also feel the pinch, so their stock reacts accordingly.
Knowing this, does it make sense to invest in the same sector? Probably not.
Then there’s my specific example. I work at a grocery store, which I will readily admit it a pretty crummy business. Competition is high, margins are low, and there’s a huge amount of operating leverage. It costs a lot of money to keep the lights on and the freezers working. I should avoid the retail sector when investing (which is my Kryptonite, but I am getting better) and focus on better quality companies.
So to wrap this up, embrace the favor your employer gives you and buy their stock at a discount. Just make sure you keep such a position on the small side and diversify greatly. The only thing that sucks more than losing your job and all your savings is that one man show I went to put on by Italics Man.