It’s really a set of flares being deployed by a C-130. But a great lesson can be found here about Samsung stock and investing in general.
On August 19th (with Samsung stock trading at near an all-time high of $23.55) Samsung launched its Galaxy Note 7 with a great amount of fan-fair. It was bigger than previous versions, it was waterproof, it had an iris scanning camera…oh, the excitement!!!
But it didn’t take long to discover it had another feature – it explodes. Five days later the first Note 7 explosion occurred and with it the stock begins to implode. And as of October 11th, 2016 the stock was trading at $19. That’s a 19.3% loss in value in less than two months. Poof.
Here’s the deal, somewhere in America there was probably a 401k participant that worked at Samsung that decided to “load up” on Samsung stock. And why not? At the time Samsung had one of the greatest competitors to the iPhone, probably had some nice fundamentals and promising future.
This 401k behavior is a nationwide problem. In fact, Proctor & Gamble has 37.7% of its $3.1 Billion Savings Plan allocated to company stock, the $12.9 billion Honeywell International Inc. Savings and Ownership Plan has 29.8% in company stock, the $19 billion Chevron Corp. Employee Savings Investment Plan has and astounding 46.7% in company stock and General Electric Co.’s $27.5 billion GE Retirement Savings Plan contains 35.5% in GE stock. Data for all of these plans are for the year ended Dec. 31, 2014.
At blooom we recommend an absolute maximum of having more no more than 10% of your 401k assets tied up in company stock. We prefer that our clients have a well-diversified portfolio. And here’s why – think of it this way. If you take ONE pencil and you try to break it, it’ll be really easy to do. If you have 500 pencils rolled together in one bundle and you try to break it…well, it’s going to be tough. If not impossible. This analogy works well for 401ks. You can have one stock, or 500 (or more) individual companies. It’s easy to break one company. But much harder to break 500 altogether. We lean toward having hundreds (if not thousands) of companies in our clients 401k allocations.
In the school of hard-knocks you are rarely afforded a free lesson. Let the exploding cell phones of Samsung be your own warning to be wary of having too much company stock in your 401k. We’re here if you have questions or check out our video on company stock for more on we handle it for an investment strategy.
Published on October 12, 2016