3 Risk Management Techniques for Owning Company Stock: A discussion for Insurance, Defense and Aerospace Executives

Matt Corthell |

Whether it is a stock grants, RSUs, employee stock purchase plans, or any other method of acquiring company stock in some of Hartford’s great insurance and industrial companies, having too much can lead to negative consequences should the investment not pan out. Let’s use a risk management framework to discuss owning company stock.

Don’t Retain More than you Can Afford to Lose

Risk, as we like to define it, comes from the inability to accomplish your goals should adverse circumstances occur. From a stock perspective, this could result from a loss in value of the investment. In working with our clients, we help quantify that risk and see how much or little a company stock loss would impact a client’s retirement portfolio. Factors like age, goals, time horizon and the level of concentration all play key factors in determining if you have too much exposure.

Don’t Risk a Lot for a Little

Would you take a bet where you have a 50% chance you win 10% and a 50% chance you lose 100%? What about a bet where you have a 10% chance of success with a 1000% payoff and a 90% chance of a 100% loss? The first bet has a negative expected return given that the penalties are so high for losing and the return is so meager for winning. This is what it means to risk a lot for a little. The second bet is a little bit more interesting. Sure, it has a low chance of a payoff, but if it works out, the return is sizeable. This is not a bet for everyone as you are risking a lot, but you might be compensated for taking such a risk with such a high return. Clearly this is a bet you would not want to make with a sizeable portion of your wealth.

Evaluate Outcomes based on the Negative Impact, not the Probability of that Impact

Is it rational at any payoff to play Russian roulette with a 1,000-chamber gun? What about 10,000 chambers? I know I am guilty of this as are many others in society, but we often think, “This won’t happen to me.” Of course, car accidents, unfortunate medical diagnosis or retirement losses happen to someone. When you have the option to avoid a terrible outcome, it's best to take steps to mitigate that future, rather than take the chance.


Looking to Evaluate the Concentration in Your Portfolio?

As mentioned above, the concentration of company stock is defined based on everyone’s own unique plan. If you would like to review your portfolio, click this link to schedule a free no obligation meeting with one of our advisors.