With $1.25 million tied up in company stock, am I taking too much risk if I want to quit in 5 years?

Diversification really is one of the only “free lunches” you’ll get from the investment world. And while one can over-diversify (the great Peter Lynch liked to refer to it as “di-worsification”), effectively adding more complexity and bloat to an investment portfolio than added benefits provided (notably, lower market risk), single-stock risk, I believe, is a big no-no for new investors, especially those who may have accumulated more stock in a single company than intended.

For many loyal employees who’ve stuck with the same firm for a number of years or even decades, it is possible to have “too much” company stock.

Staying loyal to a company by holding too much stock at the cost of proper diversification is a terrible idea.

Sure, it’s a nice, though perhaps overrated, feeling to stay loyal to the company you’ve worked for for such a long time. But realistically, you’ve got too much skin in the game of a single company, and your positive biases could get you into a bit of trouble. Indeed, when going on the hunt for a long-term investment, it pays to analyze the risks and be critical of a firm under question. In any case, when it comes to company stock, I’d strongly err on the side of diversification and limiting one’s exposure, if possible.

At the end of the day, you’ve already got enough exposure to a firm by working for it. Indeed, even with zero shares in a company, you’ll still likely be better off if the firm’s firing on all cylinders, rather than under considerable pressure.

In this piece, we’ll check in on the case of a Reddit user who’s wondering if they’re taking on more risk than they can handle. They’ve got an obscene amount ($1.25 million) in company stock and are looking to depart (for an early retirement) in around five years. Though I have no idea if they intend to dump their company stock upon retirement, I do think that having too much single-stock risk within five years of an expected retirement is a massive, potentially FIRE-jeopardizing risk that ought to be dealt with as soon as humanly possible.

How to sell more than a million worth of company stock?

Sure, there may be a hefty tax bill when one sells the company stock. But if one is serious about retiring early (in five years or less), it’s the way to go. Though a financial advisor well-versed in tax lingo would be the best bet, I wouldn’t be against stashing a big chunk of the proceeds (let’s say $1-1.25 million or so raised from the sale of company stock) into a low-cost S&P 500 index ETF. Of course, bonds, bond ETFs, gold, silver, and CDs are also safer asset classes to consider as one winds down for retirement. 

In any case, a gradual offloading of company stock over time could be the way to go if there is a significant amount of capital gains that could raise that tax bill. Personally, I think the lack of diversification is the bigger concern for the portfolio of this individual, who could realistically retire in as little as a few months.

The bottom line

In short, the answer is a strong “yes,” this Reddit user is taking on way too much risk by holding more than $1 million in company stock. Their portfolio isn’t well diversified and could be in a bad spot should the single firm crumble, even if the rest of the market doesn’t. Personally, I think there’s no excuse for owning seven figures in a single name, even if it’s the best business on the planet.

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