Have you ever watched an awkward movie or T.V. show where you had to turn your head because you knew what was coming next and you just couldn’t watch?
This is one of those stories….about me!
This is probably the most embarrassing article I can write.
It all started in 2008 when I was a financial advisor for a regional bank. I helped people manage their investments and retirement accounts (remember that).
One of the first rules of investing is the rule of diversification. This means don’t put all of your eggs in one basket or all of your money in one stock. It’s an important rule because it is the foundation of any good portfolio.
To put the majority of your money in one stock is crazy…only amateurs would even think about doing something so ludicrous. It was a strategy I talked people out of almost daily.
Before I move on, Rule #2 is NEVER (let me repeat), NEVER get emotionally attached to a stock.
I Broke Both of Those Rules
At the beginning of 2007, my 401(k) plan was worth more than $40,000, I was contributing 10% to my 401(k), my company was matching dollar for dollar up to 6%, and I was only 28 years old.
I was working for National City Bank (NCB). It was a top 10 bank in the country and had been around since the 1800s. About $10,000 of my $40k was in National City Stock and the rest was appropriately diversified among different mutual funds.
If you forgot what happened in 2007 & 2008, we had a mortgage crises. Banks started closing their doors because credit was loose and they had bet the farm on sub-prime mortgages.
I had talked to a senior level executive at NCB and he told me our bank was in a good position because we didn’t get mixed up in the sub-prime game.
After hearing this, I decided to purchase more stock because it had dropped from $37 a share to $24 from January to October of 2007. I thought I was buying it cheap and purchased an additional $10,000 worth of stock because I’m a financial advisor and I know more than everyone (insert sarcasm)
Unfortunately, I was wrong, but the stock dropped again.
This time, it dropped to $16 a share by December of 2007.
Since I am so incredibly smart (again sarcasm), I purchased another $8,000. My reasoning was it would bounce back and I would make a fortune.
Again, I was wrong.
By June of 2008, my stock had dwindled down to about $5,500 and a total account value of about $12,000.
At this point, I was no longer working at National City but still believed the stock would bounce back (see Rule #2).
I let my emotions get the best of me. So I did the unthinkable and purchased about another $5,000 at $5.00 a share.
I wish this story had a happy ending, but National City was ultimately sold to PNC Bank for $2.23 per share. This means I lost over $33,000 in less than a year.
To put this in perspective, if I would have stopped contributing to that account, kept it diversified, averaged a modest 7% return, and let the money sit in the account there would have been near $348,000 in the account by the time I turned 60. At 65, the account would have been worth almost a 1/2 million dollars.
(wiping tear from my cheek as I type)
Looking back, the experience sickens me. I had an opportunity to have a very large portfolio saved by the time I was 50 but had to start all over due to my arrogance.
Don’t make the same mistakes I did.
To avoid a portfolio disaster, here are four rules you should implement in your retirement accounts to ensure you stay on track.
1) 15% Rule
Never let more than 15% of your money be in company stock or one individual investment.
I know you hear the stories about people who made a killing on their company stock, but who brags about losing a fortune?
By limiting your overall exposure to 10% of company stock, you mitigate your losses. If I would have limited my portfolio to 15%, then I would have only lost $6,000 rather than $35,000.
2) Don’t Get Emotionally Involved
When you work for a company, it’s easy to get emotionally involved. I believed National City would never go under and that is the reason I kept buying the stock. Heck, the company had been around since the 1800’s.
If I would have stepped back and been reasonable, I wouldn’t be writing this article now.
3) Stay Diversified
Being diversified is the best advice I can give anyone investing in a retirement account. Don’t put all of your money in the S&P 500, a bond fund, or a money market. Instead, spread it around a number of different asset classes.
Now, my 401(k) is invested in company stock, an S&P 500 index fund, an International Fund, Small Cap Fund, short-term bond fund, mid-cap fund, and total return fund.
As far as the rest of my investments, I’m in the process of transferring them to either Wealthfront or Betterment. These are roboadvisors that create fully diversified portfolios for a fraction of the cost of most mutual funds.
Most 401(k) plans match your contributions with company stock. Over the years, your company stock may become out of balance and you can easily find yourself with over 50% of your money in company stock.
If this happens, you should transfer some of the money into the other funds in your account. This can usually be accomplished with a phone call or logging into your online account.
By following these four simple rules, you will have a rock solid retirement plan. More importantly, you will avoid a portfolio collapse like me.
(Disclaimer: I told this story to the best of my memory. Stock prices may have varied, but I lost a $h*t ton of money:)