Some of the best investment management lessons that I have ever learned have come from watching other individual investors make mistakes. I am fortunate once in a while to be able to pass on these lessons.
I had a Minnesota client many years ago who was one of the handful of senior officers at a big name Minnesota company. The stock of this company trades on the New York Stock Exchange.
Just prior to his retirement, my client owned almost $3 million worth of company stock. Between his stock options, his personal investments, and his company 401(k) retirement plan account, his ownership of company stock represented nearly 80% of his retirement savings.
I advised this client that he had far too much investment risk involved in owning so much stock in one company. No matter that he worked for this company and knew every detail about this company. His single stock risk was far too high.
The client could not sell his company stock options at the time. He did not want to sell his personal investments in the company stock because his income taxes would be too high.
I did convince the client to sell all of his company stock in his company 401(k) retirement plan account. We then reinvested the proceeds into a handful of mutual funds. We then put stop losses in place in order to protect his company 401(k) retirement plan account principal.
About 18 months later, the company stock plunged in value. The last great stock market decline, combined with bad company news, wiped out about 70% of the previous value of the company stock.
My client lost a great deal on money holding on to his company stock. He was able to preserve the majority of his principal in his company 401(k) retirement plan account.
The investment management lesson here is that you can’t take your loyalty to your company to the bank. Your company will not pay your bills in retirement.
Your company stock in your company 401(k) retirement plan is still a stock. It has to be managed for the amount of investment risk that you are comfortable taking.
An old Wall Street adage is that “the company does not know that you own the stock.” The same thing is true of company stock in a 401(k) retirement plan account.
Ric Lager
Lager & Company, Inc.
