Did you ever think you could have too much of a good thing?

A lot of clients and potential clients have accumulated stock options for the companies they work for. That is both a good and a bad thing. When you have stock options and the market does well and company does well, you feel invincible. That can be a good or bad thing. You have to realize that bad things can happen to good companies – as bad things sometimes happen to good people.

For example, if your stock drops 50%, you can lose 50% of your investment return. Think about if you are near retirement and suffer a large loss. What would that do to you? You might not have enough time to recoup your investment loss.

At the risk of showing my age, you might recall Enron. That was the darling stock of the internet bubble. Enron was an energy company with many employees. Unfortunately, due to illegalities and mismanagement, stock holders took a big hit. In 1997 the stock was over $90. By the end of 2001, Enron stock was worth less than a dollar. Think if you had your money tied up in that stock. In another example, in 2008, Bear Stearns stock at the start of the financial crisis, was valued at $100. It came crashing down. Within months, the stock was at $10. Think about how you would react, if something like these situations happened to you.

I am not saying you should not own stock in your company. But there are ways to go about it – through proper risk analysis, diversification, and asset allocation.