Bet it all on Black not Red

Last Friday marked the 10 year anniversary of Enron Corporation going bust.

On December 2, 2001, Enron filed for bankruptcy. In the late 1990’s and the very early 2000’s, you could hardly find a growth or a high tech mutual fund that did not list Enron as one of its top 5 holdings. Yes, it was sad when the company tanked, but it was devastating to the thousands of Enron employees who’s 401(k) Retirement Plans were brimming with shares of Enron Stock.

At the time, a little over 60% of Enron employees’ 401(k) accounts held the company stock. About 11% of that was the “company match” portion, but the rest was selected by the employees as a retirement plan holding. And essentially overnight, their plans for a peaceful retirement were shattered.

Last Tuesday, November 29, 2011, the parent company of American Airlines filed for Chapter 11 bankruptcy protection. By the end of that day, its stock price dropped 84%. Its total loss, so far this year, is over 90%.

Curious…how many of American Airlines 120,000 employees had most of their 401(k) plans invested in their company’s stock? How many of these people with families are now seeing most of their pension monies wiped out. Why? Because they were overly invested in one predominant stock, their company.

In the industry, we call an over-indulgence in your employer’s stock “Enron-itis.”
Every year, I see more than my share of people getting ready to retire suffering from “Enron-itis.” I believe that it is an epidemic condition.

It is only human nature to swear that the company that handed you your paycheck for many years is in great shape and can never have a problem. Interesting, the most severe cases I have seen are not with current company employees. The most severe cases are often with the adult children of former company employees. These adult children, usually in their 50’s or 60’s, inherited the stock from Mom or Dad and they truly believe that if it worked well for their parents, it will certainly work well for them. And believe me, because of psychological attachment to the company, it is an extremely difficult condition to overcome. You never can tell when an Enron or an American Airlines catastrophe will happen.

And what about your personal holdings outside of your company’s retirement plans? Diversify as much as you can. We advise using investment portfolios containing more than 12,000 different holdings and allocated among at least 14 different asset classes in at least 40 different free market economies. If something were to go wrong with one of 12,000 different holdings, you would expect that to have a negligible effect on your portfolio.

If you or someone you know has a bad case of Enron-itis, then have them give us a call.