Right now I am taking the max out of my paycheck (15%) and putting it towards my companies stock purchase plan. Its actually not even that good of a deal. It use to be 85% of the stock price at either the start or end of the period (whichever is lower), but NOW its only 95% of the stock price at the end of period.
Here's the problem, with ESPP it seems i get some decent tax benefits as the amount is taken out pretax, and if i hold the shares for a year I get taxed as long term capital gain instead of normal income tax (which is like a savings of 10%+ right there). Also, right now my companies stock is lower than it has been in the past, so it would SEEM like a good idea to stay in the ESPP until the stock is higher.
The main reason I want to leave the ESPP is that i've been in it for over 3 years (so i've accumulated a lot of stock alread), and i'm just now starting to diversify and would like to put a larger percentage of my paycheck into my etrade account (like 30-40%). Of course if I do that, it means I have to find investment opportunities that will do better than my companies stock + 5%.
When calculating your return from your ESPP, remember that annualized return is the relevant benchmark.
Let's say that you max out your ESPP deductions and then sell the stock as soon as you get it. Say that your plan purchases stock for you every 6 months. What's your return?
In your case, where you get the stock at 95% of the market price, you probably think that your gain is the difference between the market price and your purchase price, in this case 5%.
But think of it this way. The money that was deducted from your paycheck at the beginning of the current period returned 5% in 6 months for an annualized return of 10%.
Each subsequent contribution was invested for a shorter time, so the annualized return is higher. Your very last contribution occurred only two weeks prior to the stock purchase, so your annualized return on that amount is 5% * 26 = 130%.
For simplicity, I'm ignoring the time lag between the end of the purchase period and when you actually get the stock, typically 3-4 weeks.
Yes, diversification is a good idea, but you're not likely to find any investment that can match the annualized return that you get from an ESPP.
Also, if you can afford it, you should max out your 401K.