Limit the potential for damage

Dear Dave,

My husband started working at a new company about a year ago. As part of his sign on, they gave him $5,000 in company stock. The stock has nearly doubled in value since then, and we were wondering if we should buy more, considering how well it has done.

Cathi

Dear Cathi,

I totally get why you two might be excited over a stock that doubled in value over the course of a year. But what you’re talking about doing right now is a very risky proposition. The truth is any stock that doubles in value over the course of just one year is highly volatile. It’s unusual for stocks to do things like that, and it also means it could go down just as fast—or even faster.

I don’t know where you and your husband are in your overall financial situation, but I recommend people become debt-free except for their homes, and have an emergency fund of three to six months of expenses saved up before investing. Once you reach that point, I strongly advise to begin putting 15 percent of your income toward retirement before you start any outside investing.

Don’t get me wrong, I don’t mind a little selective and educated dabbing here and there once the basics are taken care of first. However, I’d never recommend putting more than 10 percent of your nest egg into a single stock. The reason? If the single stock tanks and you lose it all, then your loss is only a blip on your financial radar.

Of course, it would be fantastic if this single stock went through the roof and you two made a ton of money. Just make sure you limit the potential for damage in this kind of scenario by limiting your exposure.

—Dave

Photo by Jp Valery