Earlier in my career, I attended a big going away celebration for someone who was an executive at the company for which I worked at the time. I had just joined the company, and didn’t know this gentleman or his history at the company. Yet, I went to this event along with most in my department and several other closely related departments.
I can remember the scene – it was in a large auditorium-style meeting room, and there were probably at least 200 or so people in the room. The guest of honor, who was retiring, gave a speech where he recalled his proudest accomplishments at the company, shared lessons he learned along the way, thanked people who helped him achieve his success, and told a few short, funny stories. It was clear that people liked him, and that he was respected, judging by the reaction of the attendees.
Toward the end of the meeting, the guy got serious and said that he was going to share his best advice for all of us, based on his experience, that would most benefit each of us personally. The room got a bit quiet – funny how that’s the case, when the notion of individual benefits is mentioned:) Then, he told us that his best move for his family was the confidence he had in his employer, and his loyalty to it. And how did he show that? He proudly proclaimed that he took his personal investments and put it directly in the company stock. Not just some – but ALL. Yes, he invested everything he saved from his job in his company stock. He proudly, emphatically recommended that all of us do the same, and that along with our hard work will give us the same type of rewards.
Instantly, almost as if on cue, the majority of the people rose up and gave him an ovation. Heads were nodding up and down, and he was clearly seen as the loyal, good soldier who made out well. That latter part may have been the case, but not all of us gave him an ovation. Some of us – including myself and the lady next to me – were stunned and just sat there shaking our heads.
Now, I was of course happy to see someone successfully ride off into the sunset amid great fanfare and financial success. Good for him. But his advice to the crowd was flat out wrong.
He suggested putting all your eggs in one basket – the one you know best and are most closely tied to. To him, his actions were smart and honorable. To me, his actions were well-intentioned, but naive and lucky. Very Lucky.
The stock performed well over the years, increasing significantly over the time he worked there and would have made his investments. So I can see how he feels like he hit a home run – because he probably did, and I’m guessing it went way out of the park! That said, what if he took the same approach, out of loyalty, to a different employer. Let’s say that company’s stock ended up tanking. Anyone remember Enron? There were plenty of people whose personal finances were just torched by that episode.
It just doesn’t make sense to tie up a large percentage – let alone all – of one’s equity investment in one stock, out of loyalty or otherwise. Additionally, when that company also happens to be your employer, you are taking an even riskier strategy, as even more of your personal situation is directly tied to one investment.
I see how the logic could be appealing – invest in something you know very well, as opposed to investing in a wide variety of companies of which you know very little. Knowledge is better than no knowledge, it should seem.
In the case of your the equity portion of your portfolio, however, don’t invest it all in what you do know very well – your long-time employer – but invest in a diverse portfolio of companies. Index funds fit this strategy very well. Yes, I’m saying choose what you don’t know as opposed to what you do know!
Putting it all in what you know, to those that do it, seems safe. In reality, it’s a tremendous risk, in my opinion.
What’s your take? Do you feel safer by diversifying through investing in companies you may not know (index funds), or by focusing on a company that you know extremely well (employer or former employer)?