The Enron debacle has caught a number of people off guard. For most shareholders, the losses are disappointing. But for the throngs of now ex-employees who spent years funneling all of their investment money back into the company, the losses are devastating.
The case tragically illustrates the importance of diversification. You can’t escape the stories of Enron employees who had their proverbial eggs in one basket.
In his job as regional director of investments at Cleveland Financial Group, Azim Nakhooda has seen many an executive with portfolios heavy in their employer’s stock. “We have seen some portfolios with as much as 70 to 100 percent in company stock,” he says.
The problem with allocating most or all investment dollars toward the company can mean a double whammy if problems hit.
“You have to remember that 99 percent of the time the company match is coming in the form of company stock,” says Nakhooda. And often, that match is not flexible. “You can’t get on a touch tone phone and change it like your 401K.”
It is also important to take into account the stringent insider trader rules that dictate large sales of stock by an employee. “Because of the SEC rules you don’t have the flexibility and movement you have with other investments,” he says.
So what can you do? Well, don’t just sell off stock without taking a look at the tax implications. Even if you lost money this last year, don’t be so sure that means you won’t realize a capital gain when tax time rolls around. If you are going to sell make sure you are well aware of the basis and how that will affect your tax.
“Always match gain and losses, just picking the best rate of return and you may end up paying half in taxes,” he says.
According to Nakhooda, those capital gains are going to hurt even more in this economy.
“They don’t care about taxes when it’s (stock) up 30 percent,” he says. “But when it’s down…”
How to reach: Cleveland Financial Group, (216) 595-4923
