The Danger of Overinvesting in Your Employer’s Stock: Lessons from Market Leaders

Great companies to work for and great companies to invest in are two different things.

At Sterling Edge Financial, we understand the pride and confidence that come from working for a reputable company. It’s natural to believe that if your employer produces outstanding products or services, investing heavily in its stock is a wise decision. However, even the most popular brands can experience underwhelming stock performance, making it challenging for both consumers and professional investors to distinguish between a great company and a great investment.

Consider well-known companies like Nike, Under Armour, Bed Bath & Beyond, Kraft Heinz, General Electric, and AT&T. Despite their strong brand recognition and loyal customer base, their stock performance has been disappointing over the past 5 to 10 years. Nike (NKE) has seen fluctuations, Under Armour (UAA) has struggled to maintain market share, and Bed Bath & Beyond (BBBY) faced financial distress leading to bankruptcy, influenced by poor management and private equity decisions. Even Kraft Heinz (KHC), with its beloved food brands, and General Electric (GE), once an industrial powerhouse, have underperformed. AT&T (T), a leader in telecommunications, has continued to face challenges. These cases highlight that just because a company is successful in the marketplace doesn’t mean it will be a winning investment.

A Question for You

Consider this investment scenario: If you were to allocate 5% of your paycheck into one of two investment options over an 8-year period, which would you choose?

Option 1: Diversified Portfolio of Stocks and Bonds 

  • Average annual expected return: 7%
  • Worst-case scenario: The value decreases by 21%
  • Best-case scenario: The account grows by 28%

Option 2: One Stock 

  • Average annual expected return: 5%
  • Worst-case scenario: The value decreases by 50%
  • Best-case scenario: The stock increases by 70%

Which option aligns better with your long-term investment goals?

Many employees unknowingly choose Option 2 when they overinvest in their employer’s stock, believing they possess unique insights into the company’s future. However, the volatility and risk associated with investing in a single company—especially one that provides your primary income—can be significantly higher than diversifying across multiple assets.

The Illusion of Insider Knowledge

Employees often assume that their position within a company grants them a comprehensive understanding of its financial stability. However, even in large, successful organizations, critical information may not be accessible to all employees. Corporate decisions, market dynamics, and unforeseen challenges can drastically alter a company’s trajectory, often without warning to its workforce.

Case Studies: Market Leaders

Let’s examine the recent performance of three prominent companies that have had very different stock trajectories:

  • Pfizer (PFE): Experienced a decline of approximately 14% since 2020.  Despite inventing the COVID-19 vaccine and selling it world wide.
  • Johnson & Johnson (JNJ): Known for everything from Tylenol to Baby Powder and Band-Aids. Achieved a growth of about 21% in the same period.  
  • Peloton (PTON): A popular digital home fitness provider.  (Treadmills, Rowing and Spin) After reaching an all-time high closing price of $167.42 on January 13, 2021, Peloton’s stock has significantly declined, with the latest closing price at $9.77 as of February 14, 2025.  Down over  90%.

Despite their strong brand presence, these companies have had vastly different stock performances, reinforcing the difficulty of predicting investment outcomes even for well-known brands.

Comparison with Market Benchmarks

When comparing these companies to broader market indices and diversified investment options over the same period:

  • S&P 500: From the beginning of 2020 to the end of 2024, the S&P 500 experienced a total return of approximately 98.55%, averaging about 15.25% annually.
  • Russell 3000: Over the same period, the Russell 3000 Index had an average annual return of approximately 12.55%.

These benchmarks highlight that diversified investments often yield more stable and favorable returns compared to individual stocks.

Lessons for Investors

  1. Limit Exposure to Employer Stock: It’s prudent to keep company stock holdings limited.  
  2. Diversify Your Portfolio: A mix of stocks, bonds, and other assets can help mitigate unexpected downturns.
  3. Acknowledge the Limits of Your Knowledge: Working at a company doesn’t guarantee insight into its financial stability. Complex corporate dynamics often remain undisclosed to employees.
  4. Be Mindful of Behavioral Biases: Emotional attachment to your employer can cloud judgment. Objective financial decisions are crucial.  You don’t have to own shares in your company to show your commitment or emotional satisfaction of being an employee. 
  5. Evaluate Risk vs. Reward: Consider both potential gains and losses. Effective investments balance high returns with managed risks.  Concentrated portfolios tend to lead to lower investor returns.  If you do own a large position in one company, be open the statistical reality, you are taking more risk. 

A Smarter Approach to Investing

At Sterling Edge Financial, we assist clients in constructing resilient financial plans that don’t rely on the success of a single company, including their employer. If a significant portion of your portfolio is tied up in company stock, we can help you develop a strategy to diversify gradually, safeguarding your long-term financial well-being.

Avoid letting overconfidence or emotional ties to your workplace jeopardize your financial future. Learn from history—diversify your investments wisely to secure a stable and prosperous future.

Kit Lancaster, CFP®, AWMA®

President

Contact Kit Today!

This content is being provided for informational purposes only and should not be construed as specific recommendations or investment advice. Always consult with your investment professional before making important investment decisions. Diversification and asset allocation strategies do not assure profit or protect against loss. Indices mentioned are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal.

Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer member FINRA/SIPC. Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Sterling Edge Financial LLC. are not affiliated.