Invest in company stock purchase plan?

[Zummbot]

Looking for some feedback on our company stock purchase plan. My company will remain nameless (forum members who know me personally, please keep confidential), but since our IPO in the mid-80's the stock has been on an absolute tear (averaging almost 17% a year) and showing no signs of slowing down.

The stock has been an excellent investment for 30 years and I'm sure will continue to perform well. That's not the issue. The question is of over-exposure. 20% of my 401k already goes into company stock. I am employed here, so my paycheck comes from here. I also hold about $30k of the stock in a separate account that I invested since before being employed here. All in I'd probably say 20% of my net worth (plus my job) is tied up in this company.

My 401k and HSA are already maxed out, so pre-tax accounts are covered. I do have a VTSAX account as well. The question is should I add post-tax monies to VTSAX or try my hand at the stock purchase plan (or some combination of the two). We get a 10% stock bonus every year of the shares purchased through the plan. Company pays brokerage fees. Typing this out makes me think I'm already over-exposed, but the stock has performed so well for so long it makes me want to take the risk. What would you do?

[MDM]

Buy the stock to get the 10% bonus, then sell it to get the diversification protection.

[seattlecyclone]

Buy the stock to get the 10% bonus, then sell it to get the diversification protection.

Yes, do this. Just like 401(k) matching, ESPP discounts are like free money that you're leaving on the table if you fail to take advantage.

Also sell the company stock from the 401(k) if this is an option for you, and consider selling the shares in the "separate account" at your earliest convenience (maybe spreading the sales over two or three years if the tax hit would be too big otherwise).

[MayDay]

We buy, hold for the minimum required time, and sell. 

[Zummbot]

Buy the stock to get the 10% bonus, then sell it to get the diversification protection.

Ok I can get behind that. So how would this process work? The bonus gets paid in March of the following year for what you bought in the previous year.  You don't have to hold for a specified length of time, but the bonus does not apply to any shares you sell during the year. So you buy early in the year, sell early next year, and then turn around and buy again? Rinse and repeat?

[seattlecyclone]

Buy the stock to get the 10% bonus, then sell it to get the diversification protection.

Ok I can get behind that. So how would this process work? The bonus gets paid in March of the following year for what you bought in the previous year.  You don't have to hold for a specified length of time, but the bonus does not apply to any shares you sell during the year. So you buy early in the year, sell early next year, and then turn around and buy again? Rinse and repeat?

These plans really depend on the company. You'll have to ask someone at your company who is familiar with the specifics of the plan.

[spud1987]

Buy the stock to get the 10% bonus, then sell it to get the diversification protection.

Ok I can get behind that. So how would this process work? The bonus gets paid in March of the following year for what you bought in the previous year.  You don't have to hold for a specified length of time, but the bonus does not apply to any shares you sell during the year. So you buy early in the year, sell early next year, and then turn around and buy again? Rinse and repeat?

Based on how you describe the bonus, the formula would look like this: 10% bonus paid in march 2016 = shares purchased in 2015 - shares sold in 2015. If this is true, then the best method to avoid downside exposure would be to buy all of the shares in December 2015 and sell them in January 2016.

Of course, this strategy would only work for one year because the shares sold in 2016 would count against your 2017 10% bonus.

[mtnrider]

Some things to think about

pro: you're actually making _more than 10%_ annual return, assuming that they are taking money from your paycheck to cover the ESPP

con: think about the tax headache.  Figure out how much you'd actually make annually, and decide if the additional return over just buying the stock (or something else!) is worth it.  Also, assuming you're going to sell as soon as possible, there's some risk that the stock (or the whole market) would go down between the day that you purchase and the day that you can actually sell.

overexposure anecdote:  I've seen people get wiped out from being overexposed.  I've known people who were paper millionaires a couple times over due to options and company stock.  Bad news from their company and they lost a bunch.  One guy went all in, buying in his 401k + options + ESPP + brokerage.  That stock (which was a very large, high-flying, somewhat well known tech company) went to single digits and he lost practically everything. 

The rule of thumb is 5%.  You have to judge the risk/reward ratio.