Should I purchase stock through my company investment plan?

Please, please, please diversify. And do so immediately. Here’s why.

It is certainly true that “Invest in something you know” is one of the oldest investment ideas around. And so literally millions of us invest in the companies where we work. On one level it makes perfect sense. Who better than you understands the ins and out of the firm that employs you than you?

But on another, and much more important level, investing in the company that gives you a paycheck is a recipe for disaster. For one thing, by definition you already have a hunk of your net worth tied up in the company. It’s the source of your paycheck. For another, you may know all about your little corner of the world—what all the salespeople are doing. But what about the people in accounting? A few bad practices, and your investment is wiped out.

If you want to invest in the company you work for, fine. Just don’t make it a huge holding. My standard advice is no one stock should make up more than 5% of your portfolio. That applies to stock you own in your company.