The Danger of Investing in a Single Stock

Steve McDonald By Steve McDonald
Bond Strategist

Two-Minute

In the first few months of 2018, losses in General Electric (NYSE: GE) stock were two times greater than they were when Enron collapsed, and larger than the combined losses of Lehman Brothers and General Motors during the financial crisis.

That’s a ton of money!

What makes this particularly worrisome is that 43% of GE stockholders are “Joe and Wendy Mainstreet” – small investors who can’t afford such losses.

But one group of investors in particular, GE retirees, has been absolutely decimated by the collapse in the stock price.

And it’s a big problem for many boomers nearing retirement.

Here’s what happened at GE…

GE has always encouraged its workers to invest in company stock. It even offered a 50% match for employees who bought shares through payroll deductions.

That was one heck of a deal. A 50% match is unheard of, so most participated and accumulated a lot of stock.

But since GE’s stock dropped from $28 to $14, the employees who followed the company’s recommendation and bought the stock now find themselves in tough straits. Many who worked as long as 40 years in GE plants have lost so much of their nest eggs that they are looking for other jobs.

The reason these retirees are in trouble isn’t just that they owned GE stock or followed the time-proven “buy and hold good companies” thinking.

They’re in trouble because, in almost all cases, the only stock they owned was GE… and too much of it.

This is such a blatant and widespread retirement planning error, I wouldn’t be surprised if the SEC eventually limited how much you could own in a retirement plan or required diversification outside of your employer’s stock.

The problem goes even deeper than just a lack of diversification. From personal experience, I know it is almost impossible to get a retiree to diversify out of their longtime employer’s stock.

I lost a huge account when I was a broker because I told a potential client that it was money suicide to hold just one stock from his employer of 30 years. He had about 90% of his retirement invested in Exxon Mobil (NYSE: XOM).

No matter how good a holding Exxon Mobil has been… no matter how much allegiance he felt to the company that had given him everything… he was asking for trouble in holding just one stock.

His son accused me of trying to churn the account and asked me to leave their home.

That wasn’t the only time I came across a situation in which clients wouldn’t sell their former employers’ stock. Unfortunately, it’s quite common.

Another client of mine lost 70% of his wealth in one sell-off because he refused to get out of a huge position in Pfizer (NYSE: PFE).

It’s very simple: The additional risk you assume with a one-stock portfolio is astronomical.

If you’re holding an oversized position in your employer’s stock (or any stock for that matter), or if your former employer’s stock is the only stock you own, you have to diversify.

My colleague Marc Lichtenfeld’s dividend strategy with Dividend Aristocrats is a good place to start your search for replacement holdings.

Or, if you need to reduce your overall risk envelope, take a look at investment-grade corporate bonds.

Just do something!

Your allegiance to your former employer is admirable, but when the kimchee hits the fan (and in most cases, it will), your devotion will not pay the bills.

If big companies like Enron, GE, Lehman Brothers, General Motors and others can leave their investors and devoted retirees high and dry, yours can too.

Unless your employer will come to your rescue when the market does what it does best, diversify now or pay the price down the road.

Good investing,

Steve