What does the collage of company logos all have in common?
If you've guessed they're all successful blue chip companies with solid dividends, well you're wrong. In fact, all of these companies do not exist anymore. They do not exist either because they were acquired, merged, or filed for bankruptcy. The point of this image is to show that history has proven time and time again that large companies are not immune to bankruptcy or limited short term futures. In fact, over the next 50 years, it's likely that either Facebook, Twitter, Amazon, Apple, Tesla, or Google won't be around anymore.
With this in mind, think about your current long term RRSP investments. How long until you retire? What are you investing your money in for retirement? Does your current place of employment offer pension plans and other benefits?
Employers typically offer benefits to their employees either through investment contributions, health plans, or some sort of cash alternatives. Many larger corporations will offer stock purchase incentives to their employees in their RRSP accounts, and offer to match up to a certain amount or percentage of the employee's salary. For example, if Jane earns a $100k annual salary, her company ABC will match her ABC stock contribution up to 5% of her $100k salary per year. Therefore, if Jane purchases $5k of ABC stock, she will receive an additional $5k of ABC stock. That's essentially free money and a guaranteed 100% return on her $5k. It's a no brainer to take advantage of company stock purchase matching if it's offered. There's not really any reason to buy any more stock than what the company is willing to match you on. Even if the stock were to go down, you've already gained a return just by the company matching your initial contribution. Thank you ABC for your generosity.
It's easy to agree to a purchase plan of your company's stock at regular intervals throughout the year (quarterly, monthly, etc.) to dollar cost average into the stock over time, and forget about because it's all being put into your RRSP account and you are slowly putting money aside for retirement. However, what many people don't realize is how much of their company stock they actually own. It's important to keep track of this number, because over a long period of time, that lump sum of company stock that you own can become quite hefty. Look at it this way.... if you are investing your money in equities, how many stocks do you own? What ETFs do you own? It comes down to diversification. It's important not to remain over leveraged in any one stock or investment holding. Now think about that company stock purchase plan in your RRSP. How much company stock do you own? How much of that investment makes up your total investment portfolio?
Over contribution can be quite dangerous because you become so over leveraged in one stock (your company's stock) and undiversified in your overall portfolio. This is your retirement savings, so it's key that's it's treated like any other investment portfolio. If you notice you are becoming too invested in the company's stock, sell a portion of your position. Assuming the company you work for has seen stock appreciation over the long term, selling small portions of your holdings can be a good way to lock in some long term gains over the time you've been dollar cost averaging in. This is especially important to consider when your company is matching your stock purchase contributions and doubling your overall investment, because it's easy to over contribute quite quickly.
Consider this... what if the CEO of your company passes away and new management is unable to run the company as efficiently as the previous management? What if your company takes part in a giant acquisition only to realize that their debt to equity has now tripled and they are struggling to even afford their cost of capital, driving investors away and plummeting the stock price? What if company ABC gets taken over by a new board of directors who show poor capital management over the next 5 years and the company ends up getting bought out for a discount to their book value because of liquidity troubles? Half of your stock value has suddenly been evaporated, and all of a sudden, your beautiful giant RRSP nest egg has just been halved.
I'm not saying you should always feel pessimistic about the company you work for and picture doomsday scenarios all day long at your desk, but just like those big blue chip companies in the collage, its important to realize the risk of holding such a large portion of any one stock or holding in your overall portfolio. Stay on top of the amount of risk you're opening yourself up to and manage your risk tolerance, because no one wants to be left holding the short end of the stick if things go south.