(Read time: 4 minutes)
I’m going to cover employee stock purchase plans below (discounted stock offered by your employer), but want to share an important warning about diversification first.
If you’re not familiar, Enron was one of the “hottest” stocks of the 1980s and 1990s. But many investors who owned the stock had no clue that Enron was actually in the fraud business as opposed to the energy business.
Enron encouraged employees to buy their stock and even (grossly) told them to invest 100% of their 401Ks into the stock. Many did.
By the time Enron filed for bankruptcy, its employees had lost more than a billion dollars in retirement savings.
The company you work for is probably not like Enron. But there are risks with individual companies that the public aren’t privy to. These risks could affect their stock price on any given day.
I realize this is a bit of an extreme example, but the point remains:
You already rely on your employer for income, so be cautious of over-allocating to their stock as well (even if offered at a discount).
If you’re not familiar with Enron, there’s a great documentary called “The Smartest Guys in the Room.” It will blow your mind.
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The type of shit you should ignore.
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“If your finances are solid, it’s generally a good idea to invest as much as you can in your employee stock purchase plan (ESPP). A common strategy is to sell the discounted stock as soon as possible, locking in gains, and using those proceeds to fund your diversified portfolio.”
Some employers offer ESPPs (discounted stock to employees)If you have an emergency fund and no high-interest debt, you should max your ESPPEven if the stock doesn’t go up, you’ll likely make money due to the discounted priceIf you hold your stock, be cautious of over-allocating to an individual stock (especially at a company you already rely on for income)Generally, the best plan is to sell immediately, lock in gains, and fund your index fund purchases
Reader: What is a target date fund?
Cole: A target date fund is also known as a “lifecycle fund” or a “fund of funds.”
Rather than create a portfolio of index funds yourself, you can buy a target date fund that includes those index funds. The fund becomes more conservative over time as the “target date approaches.”
For example, a 2060 target date fund targets the year 2060. As that year approaches, the fund will hold more bonds and fewer stocks, increasing the portfolio’s income and decreasing its volatility and growth potential.
Target date funds are a great option for 401Ks and IRAs, but be sure to check the expense ratio. It will be a bit higher than a standard index fund, but should still be much lower than any actively managed fund or robo-advisor.
Personally, I hold target date funds in both my 401k and IRA. For most 401ks, it may even be the default option.
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That’s it for today! Enjoy your weekend and I’ll see you again on Tuesday.
PS: You have the power to replace your bad financial habits with better ones.
Disclaimer: This newsletter is strictly informational. It is not investment advice, tax advice, financial advice, or a solicitation to buy/sell any assets. Please do your own research. You’re an adult and you’re responsible for your own decisions. This newsletter may contain affiliate links, meaning I get a commission if you decide to make a purchase through my links (at no cost to you).