Okay, so the economy and the stock market are seemingly flying high again. Since October alone, our U.S. stock market has risen 22%; and the Dow Jones is flirting around 13,000. This is the highest the market has been since May 2008.
So, guess what? Your clients are going to get greedy again. People soon forget about past bad investments (Bear Stearns, General Motors, Washington Mutual and Pets.com … I miss the talking sock puppet), and fear and greed dictate most investment decisions. For many years, their 401(k)s have effectively been 201(k)s, but now they are “back to even” and ready to turbo-charge their retirement plans. And while there are plenty of stupid investment bets they will make, the worst mistake is the easiest one of all to make.
Here it is: Putting money from their 401(k)s or other company sponsored retirement plan into the stock of their company. You’d think after Enron and Fannie Mae, our clients would learn from horrendous past examples – but no. Only four out of ten 401(k) plans offer the company’s stock as an investment option, but among plans that do, on average, one-third of an employee’s equity investments are in company stock.
A phony discount
Why do employees retrace poor investment steps? Partly because the company bigwigs have loads of company stock, and workers figure, “If it’s good enough for the CEO, it must be good for me.” Partly, too, because “owning” a piece of the franchise that employs you is (hypothetically) a great motivator for the worker bee. This type of rationalization can be financially terminal, however. How the wealthy officers of a company invest their money has no relationship to average Joe Employee. Moreover, putting more assets into the company breaks investing rule No. 1: diversification.