Over the years more than one highly concentrated stock portfolio has crossed my desk. With the popularity of 401K plans and subsequent IRA rollovers, most people own mutual funds or exchange-traded funds. Some argue for increased simplicity. My friend, mentor and Chartered Financial Analyst Rick Ferri tweeted last week a single global fund and an intermediate bond fund was enough, “Everything else is icing on the cake.”
Owning individual stocks carries too much specific company risk. With higher risk expect higher returns, ask an early Apple investor. The going up sometimes is not worth the coming down. Some of us remember when General Motors and Eastman Kodak were stalwart American companies. You don’t have to get on the way-back machine either. General Electric’s (GE) market losses over the past 12 months surpass the infamous declines of General Motors, Enron, Lehman Brothers and Bear, Stearns.
In 1892, American inventor Thomas Edison hooked up with a group of Gilded Age venture capitalists led by J.P. Morgan to form General Electric. For over a century it was synonymous with American growth. Scandal or catastrophic economic conditions did not knock GE’s value rather the drop came from a series of poorly thought-out investments and a downswing in key markets. Fifteen years ago, GE generated more profit from their financial arm than from bending metal. Today GE no longer has a retail financing business. Last October GE Capital halted dividends to the parent corporation primarily due to disappointing results from their long-term care insurance business, Genworth.
GE’s stock misfortunes ripple across the country. Retail investors, not mutual fund behemoths, account for 43 percent of GE stock ownership. Making matters worse GE employees often loaded up on GE stock by buying shares through GE’s 401K plan. Retirees with pensions could face another blow due to GE’s underfunded pension plan.
If you buy individual stocks or have large stock options, keep no more than 10 percent in any single stock. While liquidation could mean a tax liability, don’t let the tax tail wag the dog. Ask anyone who owned General Motors, International Paper, Eastman Kodak, Wells Fargo, Wachovia, Enron, et al. if writing a check to the Internal Revenue Service is always a bad thing. As an employee, during a company downturn, your job could go south along with your investment. It’s a double shot and not like The Swinging Medallions.
As an individual investor, remember you are competing against teams of highly trained investment analysts who evaluate stocks all day long. It strains credibility that an investor in their spare time can consistently beat them, but it’s your money. I have no doubt some advisors can successfully pick stocks, but by the time 99.44 percent get the word to you, it’s old news. You are buying the sizzle, not the steak.
You can’t always get what you want, but Buz Livingston, CFP can help figure out what you need. For specific recommendations, visit livingstonfinancial.net or come by the office in Redfish Village, 2050 Scenic 30A, M-1 Suite 230.