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Retiring on company stock

By Jennie L. Phipps · Bankrate.com
Wednesday, November 17, 2010
Posted: 4 pm ET

More than 500,000 General Motors' retirees and surviving spouses have been given a chance to buy shares in GM's initial public stock offering.

It's a chance to buy in at the offering price, which GM said Wednesday will be $32 to $33 per share. In all, GM expects to sell as many as 478 million shares. Stock earmarked for purchase by current and former employees has been capped at 5 percent of the total.

Buying the GM IPO isn't a dilemma for most of us because ordinary investors don't have access to this or most other IPOs. However, many of us are faced with similar issues when we have the opportunity to buy our employers' stocks within our 401(k)s.

So the question for both GM retirees and the rest of us involved in retirement planning is the same: Should we buy company stock; if so, how much?

Before you buy, consider these three things:

Loyalty can be expensive. Many people have the feeling that owning at least some stock in the company that employs you demonstrates commitment. But it comes at a price. Ask retirees of General Motors, which used to be referred to as "Generous Motors" for its fat pensions and insurance plans, what happened to them when their former employer's stock fell from $40 per share to nothing when the government forced the company into bankruptcy. Some watched millions of dollars evaporate. The situation was even more dire for people forced out of the company when it nearly collapsed. They lost their paychecks and their retirement nest eggs.

IPOs can be fickle. Microsoft and Google stock prices went straight up and have stayed there. But Ivo Welch, a professor of economics and finance at Brown University who has written extensively about IPOs, says the average IPO declines in value six months to three years after the offering. Welch says GM isn't your typical IPO, so it might be different -- but who knows.

Diversification is key to investment success. Like many financial experts, Ivo advises limiting the risk that comes with owning a single stock to no more than 1 percent to a maximum of 5 percent of your investable assets. If you lose that much, it isn't a disaster.

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2 Comments
End the Ponzi Scheme
November 18, 2010 at 10:31 am

One word: Enron
Another two words: old GM

Invest in either gets a total loss of capital. At least Enron is gone, not propped up to keep the union happy. But if they killed GM once, they can do it again.