Don't Risk the Family Farm
Robert says his wife started works at a pharmaceutical company that gave her stock. The stock has doubled, and they're considering buying some more to see how it does. What does Dave think about that?
QUESTION: Robert in Raleigh says his wife started working at a pharmaceutical company that gave her a few thousand dollars of stock. The stock has doubled, and they’re considering buying some more to see how it does. What does Dave think about that?
ANSWER: It’s still very risky. A stock that doubles in one year is what’s known as a volatile stock. It’s highly unusual, and if it goes up that fast, it can go down that fast.
Number one, you need to be debt-free and have your emergency fund in place before we even talk about investing. Number two, we’re putting 15% of our income into retirement. And then if you want to be investing in single stocks, again—you said it earlier—I don’t do that because I don’t like the risk. Your entire analysis of this stock is that it went up this year. That’s your entire analysis of it. Dangerous.
If you want to play in it, that’s fine because it’s obviously a sweet company. It’s obviously doing well, and you guys are enthused about it, I don’t have a big deal about it, but I would never put more than 10% of your net worth—10% of your nest egg—into stock. So if you’ve got $50,000 in your 401(k)s total right now, no more than $5,000 should you play with on stock. If you’ve got $100,000, no more than $10,000 should you play with in stock. So that way if the stock goes completely bonkers down and you lose every dime, it doesn’t really keep you from retiring with dignity. The amount of damage is limited because the amount of exposure is limited. And if it goes through the roof and you’re right, wow! Praise God. That’ll be awesome, man. You make a bunch of money. That’d be cool, but you didn’t risk the family farm, so to speak, to make this play.