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As a result, a firm that had survived the Depression, the Second World War and numerous stock market collapses faced the humiliation of a government-assisted takeover by rival investment bank JPMorgan Chase & Co. that will likely vaporize most of the personal wealth of the firm’s executives and cost the jobs of more than half of its 14,000 employees.
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I’ve seen this before when employees fall in love with their employer. They drink the Kool Aid of “failing to diversify”. My Mom fell in love with her AT&T stock. And, I have in my memory bank, many other examples of this among my friends and acquaintances. Since the read this blog, I won’t call them out but you know who you are.
Suficeth to say, I “love” no stock or bond. I ruthless observe the old Wall Street canard “No more than 5% in any one thing!”. Bank, brokerage, Tbill, … … I don’t care. If there is a way to segment your portfolio, then you should know if you have more than 5% and make a conscious decision that “it’s OK”. That may be because there is no alternative. But, it should be a “conscious decision to accept a specific risk”, as opposed to “stuff just happens”.
There is one good question that I have been asked by my Turkeys and acquaintances. (My friends and relatives never ask financial advice since they will get a long wandering diatribe on the evils of fiat currency and the benefits of gold!)
How do you mitigate the risk of jobs and pensions?
Well, both a job, pension, and any income stream of regular payments can be viewed as like a funny kind of bond.
If you have a $100k/year job, that’s like having a 2M$ bearer bond that you can’t sell. There are the unusual risks associated with it (i.e., you can lose it; it might default). That’s why the folks at Bear Sterns investing more than 5% in Bear Sterns really blew it. If one had that proverbial $100k/year job (and most jobs there paid much more), then you had in effect a $2M “bond” in your net worth. To stay under the 5% rule, you’d have to have assets in excess of $40M. Then, you could start investing in the stock.
Unfortunately, houses, pensions, and jobs when measured on the equivalent asset basis tend to throw the 5% rule out of wack. Not a lot many can do to avoid it. But that’s no excuse to not recognizing the risk and seeking to mitigate it.
So buying your employer’s stock has to be made pretty attractive to rush in and grab that particular falling knife so to speak. Sometimes it works out. Sometimes, like Enron, it don’t. Can you afford the loss?
I’m always amazed that financial industry professionals — the experts — do such a lousy job of planning their own financials. Remember 90% of Cantor Fitzgerald employees, who were killed in 91101, had no life insurance.
Always watch out for “experts” and those who give advice like one. Even me! Do your own thinking.
But remember 5%!
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Reinke Faces Life 