I currently have the privilege of working with a IT company in Bangalore that treats its Indian employee on equal terms with any employee across the world when it comes to stock options. In simple words, my company is very generous when it comes to handing out its stock valued in dollars to Indian employees.
On one hand, it seems like a great retirement kitty when you see your stocks vesting and adding upto thousands of dollars over time. The sheer thrill of seeing the portfolio in dollars is enough to keep many employees stuck to the company with a real hope of seeking early retirement. Its little wonder that I see more employees who are on the verge of completing ten years in this company than I have ever seen elsewhere.
So what is the pitfall that Im talking about in the headline. Its about greed and the fact that most people succumb to it with absolutely no idea of the risk they are taking. Its widely accepted that its never a good idea to keep too many eggs in the same basket. The basket might be very well made and very secure, but all it takes in one wrong move for the eggs to crack !
You have your job at stake in a certain company where your salary and career depends on the performance of the company. On top of this, you are given stock options that are valued pretty highly and form a substantial part of your overall package. The point to note is that these stocks options are all about paper money till you actually sell them and convert them to cold hard cash.
And guess what do many people do on top of holding onto stock options like their dear life ? They go and put their savings from the salary into the ESPP (Employee Stock Purchase Plan) program that many employers offer !!! The ESPP program gives you a guaranteed 15% return if you are diligent about selling the shares on the day you receice them. The catch word here is diligence. The problem is that most of us are not careful about this and just allow the ESPP stocks to accumulate in same portfolio with the hope for even more profits.
God willing, the company will keep going great guns and you can retire in a few years. But what if the basket does fall and all the eggs break in one shot ? So why on earth would you not diversify your holdings and make sure that if the company does take a turn for the worse, you still have something to cling onto ?
The trick is to make sure that you cash in on your stock options when they are actually of some real value and put the money in a different asset class immediately. This way, not only do you cash in on the market boom by owning stocks of good companies, but also save your ass when things go bad. If the company you work for goes down, you have money invested elsewhere and if that investment goes down, you hopefully still have the job and salary !!!
Diversification is the key to success in the financial world. The bad news is that there is not a single asset class in the world that is not prone to falls and fluctuations. The good news is that turbulent times in one sector will always be offset by another sector going up. A good example is the violent rise of gold prices this month even as the equity markets are crashing all over the world.
Net net, when you invest your hard earned money by spreading it across asset classes like stocks, Land & Gold; across different sectors & industries; across geographies & currencies, there is a good chance that at any given point in time, there will always be one asset class that will be going great guns and making money for you. And its easy to retire soon when you have some part of your savings always bringing in 25% returns !!!
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