A common theme among portfolios brought to us for review is the concentration of employer stock, especially in 401(k)’s.    For approximately five million investors in the United States, 60% of their retirement plan is in their employer’s stock. And for all those whose 401(k) plans allow, almost ten percent have  more than 90% of their retirement plan in company stock.1 We usually  recommend the sale of the employer stock to diversify based upon two factors:

1. Market Risk  – you are not rewarded for the risk of  holding a concentration in a single stock.  By diversifying, i.e. “not having all your eggs in one basket”, you can significantly lower the risk of your portfolio.
2. Company Risk  – your single largest asset is, in a sense, your salary.  If your company does poorly, chances are your salary will not greatly increase, if not disappear in a layoff.  Employees of Enron who invested solely in the company stock not only lost their jobs but their retirement savings as well.

Even with these reasons, which are widely accepted in the financial planning industry, it is hard to convince investors to divest.   And the problem is as  prevalent among “sophisticated” investors as the general public.  Twenty-seven percent of the funds invested in Merrill Lynch’s 401(k) are in shares of Merrill Lynch.

2Jason Zweig examines in his book Your Money and Your Brain underlying neurologicalreasons for employer stock concentration.  Zweig, a senior editor for Money magazine, has written a book destined to be a classic.  In his chapter on “Confidence”, he discusses “the eerie power of mere exposure.”  Zweig examines research which shows “being in the presence of familiar things (even when we are unaware of them) simply makes us feel better.”3He claims that current research proves Aesop had it all wrong with his saying “familiarity breeds contempt.”  Familiarity in fact breeds contentment. This “familiarity” phenomenon may partly be explained because certain brain cells are dedicated to familiar objects firing upon encountering the object.  This “firing” generates a feeling of comfort.

In addition as humans, we continually attempt to control our environment.  Our jobs give us a feeling of control, as if our efforts will have a profound effect on the success of the company.  In reality, even a CEO is subject to numerous factors beyond his control.  Any “inside” knowledge we may have about our employer, especially a large one, pales in comparison to the risk that we may be wrong.

Zweig also addresses the feeling of regret that comes from selling an investment.  “The investments we own tend to seem better to us than those we don’t own….”4The potential rise in price after we sell a position is simply too painful for many to bear. Lockheed Martin is a good example of the result of the fear of regret.  As Lockheed matches 401(k) contributions with company stock, many allow positions to build up rather than diversify.  Obviously inertia also plays a large part for the holding of the positions.

Zweig references a survey indicating that  it  is much harder to sell than buy a stock. “People know perfectly well that a good decision takes more work and more thought, therefore they sweep it under the rug.”5It is simply easier to hold a position than make the mental effort to sell.

A concentration of any stock, but especially your employer’s, can place undue risk on your portfolio.  Many experts recommend that you hold no more than 10% of your portfolio in any one stock.  We wonder if even this percentage is too large.  Divesting of a concentrated position should be one of the easiest investing decisions.  But as shown, our brain can be one of our worst enemies.

1Your Money and Your Brain, Jason Zweig, page 99.

2Your Money and Your Brain,  page 99

3Ibid, page 95

4Your Money and Your Brain, page 192

5Ibid, page 221

Retirement planning is a much-discussed subject in our time. Without a doubt, planning for retirement is important but even more important for Christians is achieving or receiving “God’s Best” in their life.

The Scriptures tell us that “man does the planning and God guides the steps.” Part of the planning process must include planning to “conform us to his righteousness.” Attention to our spending habits, giving habits and lifestyle must precede and ultimately influence our planning for retirement. We have a responsibility to increase our assets so we can give more of ourselves and our resources to furthering the Kingdom of God.   Rather than designating the planning process as “retirement planning” it would be more appropriate to label the process “life planning”.

Life planning should not be seen as a static process where goals are set, projections are made, and financial strategies are put in place to achieve a goal.  This type of planning envisions the process to be linear in nature, like getting from one point to another.  A more appropriate way to approach the planning process is to see it as a “space shot or a God shot” where our lives have a certain velocity and direction which gives it a pre-established vital trajectory but the ultimate outcome is dependent upon our sensitivity to God’s Spirit.  Thus, planning requires constant course corrections to be made prompted by sensitivity to God’s Spirit and changes in tax laws, inflation rates and investment returns.

Additionally, most planning assumes people will go through three distinct stages, accumulation, conservation, and distribution.  Although these activities properly identify externally the progress of most people’s affairs, good planning does not artificially segment these stages.  Good stewardship dictates that consideration should be given to efficient distribution strategies early in the planning process and should not wait until a person reaches an advanced age.  Giving goals set early in life with God’s help can become a reality.  Conservation strategies should be incorporated into the accumulation years.

God has a plan for each of our lives.  Diligent seeking, planning, and sensitivity to the Holy Spirit can lead and guide us to the retirement God has planned for us.

“Eye has not seen, ear has not heard what God has prepared for those who love Him.”

As uncertainty has increased in the markets, we have increased our efforts to reduce volatility.   We have always had the objective to decrease the impact of market swings (i.e. volatility) on a portfolio, but it has become of even greater importance in the last several years.  Though lowering volatility decreases the chance of having exceptional high returns, it does reduce the chance of having gut wrenching declines.

This “tortoise and hare approach” makes it easier to sleep at night because your accounts are not rapidly changing in value and can even result in greater wealth over the long term.  Consider the following two accounts:

Both portfolios have an average 10% return.  And though Portfolio B had great returns in period 1 and 3, Portfolio A actually resulted in more money in the end.  By lowering volatility, we can aim for lower, and thus assumed, safer returns in a portfolio as shown below:

Prior to 2007, we approached investing from a strategic perspective.  As we felt we were in a period of rising markets (think when “buy and hold” made sense), we used investments engineered to provide exposure to the markets in an efficient manner – in a sense doing our best to take what the markets gave us.

Though of course we could be wrong, we now perceive that we are in a period of more “choppy” markets with more down years than the historical average. Our new strategy is not an attempt, as the commercial says, “to take the scary out of life”, but a measured response to our perceptions of new worldwide risks.  Our investment perspective is now more tactical in nature.  Our current strategy is more concerned with the individual elements of the portfolio – attempting to use investments not only “right” for the times, but also with the ability to offer some downside protection.

This tactical approach using our lower volatility portfolios is not as efficient as the strategic approach.  If the markets do indeed return to the long term pattern of positive results, our performance will lag.  However given the uncertainties in our world, we think the “slower” tactical approach is more prudent.  We will be alert for signs that the markets have returned to long-term trends signaling that the more strategic approach may become appropriate.

Please contact us if you would like a current example of our lower volatility portfolios.