MaineBusiness.com

Have Over 10% of your Portfolio in Employer Stock? Ten Reasons Not To

Five years after Enron, people still don’t get it.

The problem is holding too much of your portfolio in one stock. Often this occurs because you work with a company provides stock options, discounted stock purchase plans, awards in restricted stock and the opportunity to load up in your 401(k) through employer matches in stock and the ability for you to buy more. All it takes is enthusiasm for what you do and a blind faith in the company and the wheels are set in motion. The corporate “kool-aid” is within you and you start loading up.

If you are one of those people, here are ten reasons why you better think twice:

10.) It costs you more financially because of the risk you are taking. A concentrated position requires over-funding for goals and excess ways to insure because there is always the risk that the stock will go down at the wrong time. What if the stock tanks right when you are retire, you are about to pay for your child’s college education or if you passed away with a family to support?

9.) People hardly recognize the risk in the above; so they rarely ever do anything beyond the norm to protect themselves. It may be within their risk tolerance, but they don’t have the capacity to bear the financial risk.

8.) “Even the best companies will drop 50% every 20-30 years” – Warren Buffett. There are many great companies trading right now at half their value from their latest peak. Look at a majority of banks.

7.) Concentrated stock positions are analogous to refusing to wear your seat belt when driving a car. This is uncompensated risk. It takes little time and effort to diversify this risk and have so much to lose.

6.) If your company somehow defies gravity and goes to infinity, you can become rich with it being just 10% of your portfolio.

5.) Eighty percent who make their wealth due to a concentrated person lose their wealth because of a concentrated position.

4.) Not only do you hold risk in your investment assets, you have risk in your career asset. So if the company does well, you don’t necessarily have to stuff all your investment assets in the company as your career should expand with the success of the business. What if the company goes under? Not only did you lose a significant portion of your life savings, but you now are also unemployed.

3.) Adelphia, Enron, Worldcom, Delphi; need I say more? Also you are not immune if your company is private either: remember Arthur Andersen?

2.) OK, I will say more……..International Harvester and Bethlehem Steel: both were members of the Dow at one point. Where are they now?

1.) If the stock tanks, your significant other will never let you hear the end of it. Not any financial cost here, but being reminded about it for the rest of your life won’t be worth it.

The problem is that people who hold concentrated risk are essentially gambling, not investing. And the excuses run right down the sleeve why it won’t happen to them……but it eventually will. It may not be today or tomorrow, but you only need to be wrong once in the next twenty to thirty years. That’s a long time to be always right.

Well at least you can’t say that you haven’t been warned.

Hooray for the Voter Stimulus Bill

Of course I’m being sarcastic here, but the economic stimulus legislation expected to be signed by President Bush will create little economic stimulus; short or long term.

The centerpiece of the legislation is a rebate check of $300 per person if you make less than $75K or $600 per married couple if you earn less than $150K. Then you would get a rebate of $300 for each child. It even extends to some who don’t pay taxes. The rebate is a gimmick. The government is hoping that everyone is going to go on a shopping spree, but let’s be real here: How much is it going to help the economy? If they are deficit spending, shouldn’t the government treat this spending like an investment; deploying it where it’s going to generate a return on investment in the form of higher economic growth, which in turn creates long-term tax revenues that exceed the original investment?

The second part is accelerated depreciation for business’s that make capital expenditures. This may encourage some additional business spending, but again, I think this doesn’t have teeth as business’s usually plan out their expenditures over time according to needs; if the economy is slowing, is it really going to create a splurge in capital spending: I doubt it.

The housing measure would make it easier to finance or refinance mortgages for larger homes and in more expensive housing markets. Now this may help a bit, but I don’t see this reinvigorating the housing market either.

If Washington was serious about creating a package that had long term staying power, they would:

-Make the individual marginal tax brackets from the 2001 tax act permanent (with some adjustment to address the alternative minimum tax as discussed below).

-Lower the corporate marginal tax rates. When profit margins shrink, what do companies do first: they begin laying off their workforce. Lower taxes would at least increase the margin where companies have to make that decision. It would also allow them to better contend with their competitors overseas.

-Make the qualified dividend and long-term capital gains rate permanent. Even though the national savings rate is a debatable measure, I still think America as a whole does a pretty lousy job at savings for tomorrow. We need to maintain some sort of incentive to invest. Instead, these rebates are being handed out because Washington wants you to spend.

-Kill the Alternative Minimum Tax (AMT). This was originally intended for taxpayers who made over the equivalent of one million dollars a year back in the early 70’s. Now it encroaches on the middle class, especially in high tax states like Maine, which increasingly puts us at a disadvantage to lower tax states. Although I’m not a subscriber of the tax the rich mentality as I think it’s a cop out, but why not have a higher marginal tax rate for those who make over a million that will offset the lost revenue of the AMT? I guess Congress doesn’t want to lose their campaign contributions. But I would watch this very carefully; the AMT was a lingering problem that Washington decided to ignore and patch. This could play out similar to how our Social Security system is played out in the years to come.

Agree or disagree with me, but if Congress was really serious about long-term economic health, this legislation wouldn’t be happening. And it’s amazing how duplicitous the fiscal restraint proponents on Capital Hill are so willing to hand this out like candy in such a bipartisan manner no less. You would think this is an election year. Oh right, it is.