Who Do You Blame When You Lose $6 Million Overnight?
The New York Post presented an article about David Shorr, a shareholder of Lehman Brothers, who lost $6 million as the company filed for bankruptcy. David spent many years as an employee of Lehman Brothers, building up compensation in the form of stocks which are now worthless.
“What the hell was he thinking?” asked Shorr, who placed much of the blame on the hard-charging executive who has been one of the country’s highest-paid CEOs. When asked if he had any hopes of recovering his nest egg, Shorr just shook his head and waved his hand. “It’s gone,” he said with a sigh.
David Schorr is now a wealth adviser at Morgan Stanley. As a wealth adviser, you would think that he were familiar with the concept of diversification. While the CEO of Lehman Brothers may not have guided the company through the financial mess, as an investor, David has a responsibility to his future self to maintain an asset allocation that isn’t exposed to any one company.
It’s a lesson that many former Enron shareholders may have learned.
Diversification isn’t a guarantee; for example, if American International Group (AIG) had been allowed to fail, the global markets could have tanked, destroying even better-diversified accounts. But diversification limits your exposure to any one company, so it is less likely to lose your entire life savings due to a singular event.
In my 401(k), my employer matches a portion of my contributions, and a portion of that match is in the form of company stock. Every once in a while, I sell that stock and rebalance the allocation among mutual funds to limit my exposure to my company’s performance. Since my salary and benefits are also tied to my company, the less company stock I rely on, the better.
I will admit that I haven’t limited my company stock as much as I should. The last time I diversified out of company stock was over a year ago when the stock was at its highest point; its value, like that of other financial companies but to a smaller extent, has dropped since then.
I Lost $6M Overnight!, Braden Keil, New York Post, September 16, 2008