Question

1. Is employer stock an appropriate investment alternative for DC plans? Should there be a limit to the amount of employer stock held in any participant's account?

2. What do you think about psychological behavior and biases when investing?

Answer 1

1.Well, employer stock investments are one of the good strategy for DC plans.

This is because, most of the times employers provide their employees with a discount from the actual price. For example, current stock price would be $ 1.25 and employer is providing this for $.25 ( generally 15% less from the market value) will obviously create more and more profit in the long run.

However employee should understand more about the company more such as how the company Is performing over the period of time, what is competence of present management and also some types of fundamental analysis, if the employee is planning to hold this for 5 years or more.

Holding too much of employer shares are risky , what if , if the company goes through a tough times or a kind of recession, that is if that company doesn't have the competitive advantage to come out of recession then the investments made would be pathetic.

So, it would be smart if the participants have the capability to diversify his investments as soon as possible.

2.

Psychological behavior has a huge impact while investing, after all most of the human behave in this way because human minds are built like that. For example, in stock market we can see that if a particular airline faced an engine failure and burst off while traveling, if we can closely look at the stock prices we can precisely see that airline stock decreases in a tremendous way however it can be also see that after one week it regains its older pace, because humans forget it.

This is one type of investing behavior there are lot more.

Based on a study psychological behavior is mainly divided into two: Cognitive and emotional. Cognitive includes mental accounting, over confidence etc and emotional includes optimism and loss aversion.

Most of the investments done are based on how they think and also based on their feelings.