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Old 12-02-2007, 04:57 AM
Preem Preem is offline
Join Date: Jul 2006
Posts: 98
Default Re: Should i stop my ESPP for more diversity?

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.
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