Is Participate In My Employee Stock Option A Bad Idea?

with us Christmas in New York hi Chris

welcome to the Dave Ramsey show hi Dave

thanks a lot for taking my call sure

what's up I have a question I'd like to

get your opinion

I currently take out nine percent of my

paycheck and my company matches six

percent and they also recently I signed

up just at the bare minimum for they

offer an Employee Stock Purchase Plan

and it's a very very good stable company

big big orthopedic company so they're

gonna be around for a while and the the

the good deal is that it's 15% off of

what the public is I the stock it always

is all employee starting that plans are

exactly the same and and and I know from

listening to you that you personally do

not get involved as you say in

individual stacks but would you make an

exception in that regard no not at all

no the only way I would do it is after a

year up in the baby step past baby step

four are you debt free except your home

no no I owe about $1,200 just done on a

credit card then that's about it really

okay you need to get that cleaned up now

you have an emergency fund of three to

six months of expenses not yet no I'm

working on that we teach people not to

start investing until you've done those

two things and at that point I would

tell you to start putting 15% you put

15% of your income into retirement and

that's 401ks or Roth IRAs or Roth 401 KS

then on top of that it sounds like your

company's going to give you a match

which is wonderful and we recommend you

put that into four types of growth stock

mutual funds growth growth and income

aggressive growth and international and

I spread my personal 401k that way

across those with good track records

with long term track records that way

above that

when you start talking about buying a

house if you want to do some other

investing at some point and you want to

buy some single stocks and you want to

buy single stock in that company that's

fine that's fine but I don't want you

wouldn't I don't want you to do it

because it's such a great deal because

it's not that great a deal

15% office and not that great a deal and

I'll prove it to you

go pull your very big very stable

company up and look at the 52-week high

and the 52-week low you're probably

going to see a 15% move in the two and

so the discount that you got can

evaporate in about an eyeblink when

you're playing with single stocks and

say okay it's okay to do that but no

more than ten percent of your total net

worth needs to be in the single stock

and you know you're really not cheating

the system everybody that has an

employee stock option plan is 15% off

everybody does but the volatility will

make that go away in a heartbeat because

you're playing a single stock so it's

okay to do it but you need to have all

these other things done before you do it

and only then and then I would only have

no more than ten percent of your net

worth tied up in single stocks in one

company because here's what I ran into

many many many years ago Procter &

Gamble took a huge hit and I'm Anna's

probably this might have been twenty

five or thirty years ago

Procter & Gamble's a huge big stable

company but they went through a period

of time they took a huge hit and I sat

down with this long-term employee who

had worked for them for forty years and

this is where I learned one of the

places many times I saw this story and I

just decided I'm not gonna do this and

this lady the sweet lady had worked with

him forever she had seven hundred and

fifty thousand dollars in her 401k one

hundred percent of it in P&G stock and

it suddenly became more three hundred

that's what the that's what can happen

to you when you're playing a single

stock and you know you're not

diversified you've got everything tied

up in that she bet her whole

existence on Procter & Gamble

that's a dumb bad I'm not picking on

Procter and Gamble I don't care what

company fill-in-the-blank don't bet your

whole existence on one company that's

just dumb

you know don't have all your eggs in one

basket we say in the investing world so

that's why I say if you're gonna play

single stocks even your company single

stock even with a discount don't have

more than 10% of your net worth in there

because let's say she had $750,000 in

her 401k and 75,000 of it was in stock

and that went in half and that became

worth 37,000 she would have lost 37,000

out of 750 instead of half of her money

it substantially changed the quality of

her retirement because she was not

diversified she was stuck in this one

stock in arguably one of America's best

companies in arguably one of the most

stable companies that you can think of I

mean Procter & Gamble's not exactly a

volatile crazy world you know they're

not it's not exactly like a tech stock

or something this is not a startup for

God's sakes it's a huge monolith of a

company and to think that it would you

know just but they went through some

earnings issues back then and I have no

idea what their stocks doing now and I'm

not saying don't buy Procter & Gamble

nothing do probably that's not the point

the point is the story is a true story

and the sweet lady lost half of her

retirement because she violated the idea

of diversification and she had all of

her money in one place the Bible says in

Ecclesiastes spread your portions to 7

yes to 8 for disaster may come upon the