Why Wall Street Workers Are Worse Investors Than Main Street

Main street investors
Wall Street's big banks paid out an astounding $156 billion last year in salaries, bonuses, and benefits.

Yet while investment bankers' checking accounts were growing, their retirement savings took a massive hit.

According to a recent Bloomberg article, at the five largest Wall Street banks, employees who held their own company stock in their 401(k) accounts experienced more than $2 billion in losses in 2011. Even worse, sometimes company stock was the biggest holding in those worker portfolios.

Point Fingers All You Want

Although reading this may make you chuckle with schadenfreude, there's a lesson here that may apply to you as well.

The huge amount of money these bankers lost happened because of poor diversification. In other words, these investment bankers had too great a share of their portfolios tied up in their employers' stock.

  • Last year, Morgan Stanley (MS) employees held a whopping 24% of their retirement assets in their company's stock.
  • JPMorgan (JPM) employees held slightly less: 18%.
  • At Bank of America (BAC), company stock represented 13% of assets held.
  • Citigroup (C) and Goldman Sachs (GS) employees were less invested in their employer, with company stock in 401(k) plans representing just 8% and 2% of assets, respectively.


While this trend is startling, it's not one unique to Wall Street.

In fact, according to Callan Associates, Americans who have the option of buying employer stock in their 401(k) plan have an average of 13.4% of their retirement assets in their company's stock.

Have We All Forgotten Enron?

The decision of whether to invest in your own company's stock is difficult because you'd like for your daily work to impact the growth of your savings. You're familiar with your employer, which also breeds confidence.

But when your income is tied to a company and your investments are also entwined, one bad quarter or year and both your job and savings could be gone.

Which is what happened to Enron employees following the company's 2001 collapse -- and Jim Carrey's character Dick Harper in the 2005 movie Fun With Dick and Jane after his company, Globodyne, suffered a similar fate.


How to Be Smarter Than Wall Street Employees

There's nothing wrong with owning your company's stock. But it should account for only a small fraction of your assets.

A safe rule of thumb is for it to comprise no more than 5% of your overall portfolio.

If your company gives you no choice but to receive a 401(k) match in the form of the company's stock (which is the case at Morgan Stanley -- explaining why their number is so high), you should immediately sell those shares and invest the proceeds in a more diverse portfolio.

That means a mix of large-cap and small-cap, domestic and foreign, growth and value stocks, which will help you ensure a comfortable retirement, and not leave your long-term financial security tied too closely to the health of the company that's responsible for your paycheck.

This article was written by Motley Fool analyst Adam J. Wiederman, who owns no shares of the companies mentioned above. Click here to read Adam's free report on the best ways to plan for a wealthy retirement. The Motley Fool owns shares of Citigroup, JPMorgan Chase, and Bank of America. Motley Fool newsletter services have recommended buying shares of Goldman Sachs.

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14 Comments

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Tiffany

Check out the book: The Great Wall Street Retirement Scam by Rick Bueter

July 26 2012 at 12:17 PM Report abuse rate up rate down Reply
1stWorldPeasant

When employees receive company stock as part of their compensation package, they are often receive restricted (Rule 144) stock, which cannot be sold until a certain date after it is issued (6 months is not uncommon). More and more companies are paying bonuses with restricted stock instead of cash. Hence, many of the employees Wiederman mentions above are being forced to hold their company's stock. They're not invested in it because they're stupid.

July 24 2012 at 9:57 AM Report abuse rate up rate down Reply
bchrist751

Last night on Fox they mentioned that the average retirement saving for those 50 and over was $45,000 and those under 50, was $2,500.....

Could these numbers be correct?

July 19 2012 at 1:55 PM Report abuse rate up rate down Reply
1 reply to bchrist751's comment
jdykbpl45

Unfortunately, very typical.

July 19 2012 at 5:13 PM Report abuse +1 rate up rate down Reply
ccm989

One word -- diversify.

July 19 2012 at 12:19 PM Report abuse rate up rate down Reply
Hello, Karen

Not to worry, they can stuff their bonuses into their designer luggage and live off of that.

July 19 2012 at 12:12 PM Report abuse rate up rate down Reply
Nick

Wait you mean some of their pay is in the form of stock in their own company? And that stock is down? And their personal funds are down because of this?

Thank you for pointing out the obvious Adam. When I company offers stock as part of a retirement plan and the stock goes down their retirement plan will obviously lose value.

Just another article trying to bash wall st, when in reality it is just point out the obvious.

July 19 2012 at 12:07 PM Report abuse rate up rate down Reply
dontcalld

wall street is not an entity unto itself but the end result of all the work done by hands, until traders realize that our financial well being will collapse

July 19 2012 at 11:52 AM Report abuse rate up rate down Reply
tsik_see

Wall St. was allowed to become a dangerous entity, just as regular banks have become. What I find disturbing is Credit..... Virtually, every town, city, community, state and even countries, besides the 99% of the World Pop. is indebted. If you look at the two greatest customers of the Media it's Wall St. and Politics who own more mouths then even the drug co.'s. You have to realise that it isn't really Wall St., but the Media who is selling it to you. From MSNBC, Bloomberg, WSJ etc etc. It is "they" who created this Wall St. icon no different then creating a Justin Bieber. The repeal of Glass Seagall simply made this the mess it became and allowed it to encompass the global economy. Creating synthetic's was as much an attempt at greed as anything else in our history, and should REMIND people just as restrictions are placed upon our very lives daily, so shall they be placed not only on the Financial World but the Media also. One must not sell people dreams or hopes, but reality and truth.

July 19 2012 at 11:01 AM Report abuse +1 rate up rate down Reply
kolblh

Wall Street? Nah, can't be. Most trusted street in the country?

July 19 2012 at 10:45 AM Report abuse +1 rate up rate down Reply
mily469

wall street has not had any long term vision for some time now. short term blind greed rules wall street today.

July 19 2012 at 10:41 AM Report abuse +2 rate up rate down Reply