Bill Gates did it. So did Michael Dell and the Walton clan and many of the wealthiest people in America. Why shouldn't you?

They all got rich by betting on a single stock. That's what a lot of today's employees are hoping to do, too, by investing heavily in their employer's stock through stock options, discounted purchases of stock, and employer funding of pension plans or matching employee retirement plan contributions with company stock.

However, many financial advisors caution that although loading up on company stock can make you very wealthy, it also can increase your risk. Your portfolio, as well as your job, is riding on the fortunes of a single company. That company may look very good at the moment, but that's not a future guarantee. Consider the fate for employees heavily invested in the following companies.

• After hitting a high within the last year of $120 a share, Microsoft was down to $67 a share in mid-September.
• Amazon.com fell from 113 to 45.
• Puma Technology dropped from 102 to 24.
• AOL went from 96 to 56.
  

It isn't just high tech stocks, either. Consider the employees of "old economy" stalwart Procter & Gamble, whose company stock makes up 93 percent of their profit-sharing retirement plan. That was great when the stock was returning years of double digit returns, often well above S&P 500 returns. But then it started falling well behind the S&P, and in 2000, PEG stock fell from a January high of 118 a share to a low of 53, before rebounding slightly by mid-September to 61.

Most of these stocks will rebound fully in time, and then some. Furthermore, there are tax advantages to holding company stock until retirement and putting it into a taxable account instead of rolling it over into an individual retirement account. There also are tax advantages if you plan to pass stocks on to your heirs. In the meantime, however, it makes for tremendous volatility for employee or retiree investors. If company stock is the principal source for retirement income, steep price declines can delay or derail plans to retire, or reduce retirement lifestyle.

A well-diversified portfolio minimizes the impact of a dramatic decline in one or two or even several stocks. Indeed, most investors building an investment portfolio from scratch would never commit 93 percent of their assets to a single stock they know that's poor diversification. Yet employees-particularly executives at start-up companies but even rank-and-file at seasoned companies routinely load up their portfolio with employer stock.

Many Certified Financial Planner practitioners prefer to see their clients keep a much lower company stock commitment. How much lower varies from planner to planner, but might range from as little as 5 percent to as high as 35 percent.

Diversifying often isn't easy for employees, since companies often will match retirement contributions only with company stock, they pressure employees to invest in the company, or they may restrict the sale of company stock. Here are several strategies for diversifying.

• Keep the rest of your portfolio in different industries or types of assets. If your employer stock is large cap, consider putting the rest of your money in such assets as small cap, international
  and bonds.
• Buying employer stock sold at a discount is probably too good a deal to pass up, but try selling older shares at the same time so you don't increase your overall position.
• Don't dump the stock all at once, even if you can. Spread out selling to reduce volatility and minimize the tax trite.
• Some employees have borrowed against their company stock in their 401(k), forcing the sale of shares to fund the loan, then repaying the loan and investing in other assets offered by the plan.
• Consider more expensive or exotic strategies such as "collars," which can effectively lock in a price, or tax-free swaps of stock through an exchange fund.
  

October -30- 2000