On Not Following Your Own Advice

A Bloomberg article by Michael J. Moore shows that finance and investment employees frequently commit the cardinal sin of failing to diversify their personal holdings by holding too much of their own company’s stock:

Current and former Morgan Stanley employees, who receive company shares to match their 401(k) contributions, held 24 percent of retirement assets in the firm’s stock before last year’s decline, the highest percentage of any of the banks. They lost $570 million in 2011 as the shares plunged 44 percent.

Bank of America Corp. (BAC) employees lost the most, $1.37 billion, as the lender’s stock dropped 58 percent last year. Workers at JPMorgan Chase & Co. (JPM) and Citigroup Inc. (C), both based in New York, also lost hundreds of millions of dollars.

JPMorgan employees, some of whom received stock in the company until last year to match retirement contributions, devoted 18 percent of their funds to the lender’s shares at the end of 2010. Bank of America employees put 13 percent of their assets in the bank’s stock, while the figures for Citigroup and New York-based Goldman Sachs Group Inc. (GS) were 8 percent and 2 percent, respectively.

This quote is worth reading:

“You’re already relying on that company for your job, your income, benefits and everything else,” said Chris Baker, co- founder of Carmel, Indiana-based Oaktree Financial Advisors Inc., which manages $100 million and primarily advises employees of drugmaker Eli Lilly & Co. “It’s not just another stock. It can magnify the impact on your personal finances if your portfolio takes a beating and your employer isn’t doing well.”

It is always interesting to note how good we humans can be at not following our own advice. I think of all the doctors you see (or used to see, at least) huddled around on the sidewalk, smoking cigarettes. Most powerfully (and humbling), I think of behaviorist-king Danny Kahneman‘s admissions that he himself falls prey to the planning fallacy and other behavioral missteps.

Who else can you think of that fails to follow his own advice?


Liz M

I imagine their matching 401k contribution in stock form vest over a period of at least a year. Did they have so much stock because it hadn't yet vested and they weren't allowed to sell it?

How many of them held *more* company stock than they were given? Otherwise I think this just implies laziness/apathy, rather than a belief that sticking a substantial fraction of their retirement in company stock was a good idea.

Daniel G

Perhaps more to the point, I'd be interested in comparing the holdings of Morgan Stanley employees to those of employees at non-financial firms with similar benefits packages.

Peter

In the UK the Liberal Democrat party is pushing 'employee ownership' to increase productivity and unlock economic growth. I agree though that it's too risky to have your job, pension and investments all wrapped up in the same company.

Cor Aquilonis

I don't think every employee at Merrill Lynch was a financial advisor, so I don't think it's correct to write a post that says "LOL shoulda followed your own advice." Also, company match in the 401(k) was company stock, and there were several incentive programs that were funded in company stock and had vesting periods (per 2011 10-K.) Unless an employee was diligently and frequently diversifying, they're going to end up with big chunks of company stock by default.

Let's not kick people who were set up by management to have much of their portfolio in company stock when they're down.

Morosoph

From a pure free-market perspective, this is of course right, and is surely right for bank employees.

But regarding the rest of the economy, owning shares in your employer has the effect of encouraging the employees to share the employer's interests over the same time-frame as they're likely to hold the shares. This means that for the employer, some or all of the value of the shares comes back in the form of employee goodwill. Thus, as a form of renumeration handing shares to employees is an excellent deal.

But what is in it for employees? If employers or other employees know about what shares you own, there is value in shared entreprise. But if not, why not sell? This seems to a case of the Prisoners' Dilemma. However, the iterated Prisoners' Dilemma has a stable solution: mutual co-operation. Although holding onto your shares is a one-off, evolutionary history has predisposed us to co-operate. Hence employees hold onto their shares.

Read more...

Pshrnk

Yes, but what percentage of employees enjoy stock options that could be lucratively exercised after a short term price run up based on creative bookeeping or other chicanery? Most high level decision makers have options that may result in their interests not being aligned with most employees interest in a stable lnog lived company.

Marc Resnick

I am terrible at this. I provide web-strategy consulting for small businesses, especially in social media. And yet, my own web presence is pretty minimal.

frankenduf

obama- his campaign advice to bush was all progressive, but he failed into busch lite

Desmond

I remember one peditrician who was a part of the group that I visited as a child was obese. The effort of him walking out of the room to retrieve samples or test results was too much and instead relied on the phones and assistants to bring him things.

Then it seemed odd to me that he was able to get patients -- would parents want their children to be told to exercise by a man who was constrained to a chair or by a spry doctor?

Enter your name...

That could work the other way: Get some exercise and knock off the junk food, or you'll end up like me.

I know that when I see an obese person in the grocery store, I'm less likely to buy anything sugary.

Chris

Computer professionals who don't back up their data.

Jason

I have had strategic planning experiences where people want to "think outside the box", but few of these ever end in any result that is far from the starting point. This is particularly bad when you have paid consultants telling you to think outside the box, but they bring templates (either physical or just in their heads) of what the final product will look like, based on prior work they have done.

I expect that this is a corollary to the planning fallacy, since everyone always starts with the assumption that there will be enough time to develop and implement a grand plan.

Matt

It is necessary to know how much of a discount they got in buying their own company stock when assessing if they had "too much" of it.

Taylor

Just because 18% of a banker's 401k is in company stock doesn't mean he isn't diversified in terms of his total portfolio. Just think about the maximum annual contribution limits compared to what a banker is likely to make/save.

Eric H

Another example of failure to diversify:

Someone who owns a personal residence, but still put a portion of their investment portfolio into real estate. Unless your investment portfolio is significantly larger than your personal residence value, you'd probably be way over-weighted in real estate and unfortunately, non-diversified within the category.

Devil in the details

I question the accuracy of these measurements. My current 401K represents only 10% of my entire "retirement" (non-taxable) portfolio. Even if my company stock represented half of my 401K, it would still only be 5% of my portfolio (and that does not include non-retirement investments). What percentage of retirement holdings does an employee's current company 401K accounts represent?