My recent column about the Enron debacle stirred up a lot of response from readers. Here's a sampling:
Thanks for finally pointing out the culpability of Enron's employees in their own demise for heavily investing in Enron stock when they should have known better.
One tidbit I wish you would have added: Those huge sums of money lost were mostly gains from stock price rather than money actually invested by the employees or matched by Enron.
How many 35-year olds do you see with 10 years of experience and $900,000 in their 401K? Not many, I'll bet.
The average person saving what these employees have been saving with modest returns would probably be sitting on something more like $100,000. I feel bad for the employees at Enron and what they have gone through, but let's keep things in perspective.
Great point. Thanks for making it.
I disagree with your statement: "The problems at Enron, and the larger problems they have brought to light, WILL be resolved in short order" (Diversify to Avoid Enron Employees' Fate! Feb 15, 2000).
Yes, some things will change. BUT: 1. Will the SEC forbid ALL off the books accounting? 2. Will the SEC forbid accounting firms from also consulting? 3. Will Pro Forma statements in lieu of real statements be forbidden?
Yes, there will be "industry groups" and companies that do get straighter. BUT will it become law? (as for 401k cleanup: President Bush's proposal does not even say anything about maximum percentage in a company stock.)
AND... will those that perpetrated the Enron hoax and got rich go to jail? Only if these things happen, really happen, can you say that the "the problems at Enron, and the larger problems they have brought to light... are resolved."
I hope you don't expect me to predict exactly how this issue will be resolved from a regulatory standpoint!
At this stage, President Bush has called on the Securities and Exchange Commission to increase its oversight and is also asking for an independent board to oversee corporate accountants. Proposals have been introduced in Congress requiring retirement plans to give employees the ability to diversify out of their corporate stock at an earlier date.
The point is, corporate America has been put on notice and so has the accounting profession. There will be greater scrutiny. There will be greater disclosure. And, frankly, I would not be surprised if some folks ended up serving time.
Be patient. Keep the faith.
My employer matches the contributions I make to the retirement plan with company stock. I would like to diversify but can not touch the stock in the 401K until I'm 55, and then only a portion of it.
Can they do this legally? Or do I have a right to diversify any amount any time?
Your company is not only completely within the law, but it could actually be more liberal than required!
It sounds as if you've got an "ESOP" (Employee Stock Ownership Plan). In that case, employees must be allowed to sell up to 25% of their company stock and invest the proceeds in other investments within the plan, but only if they are age 55 or older AND have been participating in the plan for at least 10 years.
An ESOP isn't required to allow you to diversify out of 50% of your company stock until your sixth year of eligibility. So your employer is permitting you to do this five years earlier than required by law.
On the other hand, if you have a profit sharing or 401(k) plan that is not an ESOP, there is no diversification requirement at all. The company has complete control over how its money is invested.
Furthermore, while this is not that common, a company can also dictate how the employees' own contributions to the plan are invested! Gee, you had no idea your employer was so benevolent, did you?
Hope this makes you feel better!
Just read your article and I could not agree with you more, that the employees who loaded up on Enron stocks for their long-term security made a big mistake. But I could not disagree with you more about your recommendation to invest in foreign stocks. That part of the market is just too volatile to trust for long-term investing.
My personal opinion is, depending on the person's risk aversion, they should stay with the large institutional investors. Putting your money into individual stocks is pure gambling unless you have enough money to diversify.
But I have to ask this question. Why do you suppose the individual investor tries to think they can pick stock market winners?
I contend one of the reasons is the financial press. They are constantly touting stocks of companies, and telling about the successful investors. I don't have the answer, but I am willing to bet that most small investors, by a large margin, don't outdo any balanced mutual fund over a long period of time. I've played the stock market for more years than I can remember (I still do). I think I have a very good understanding of how the market works. But I do not fool myself into thinking I can outsmart the market. I do it because I enjoy gambling, which is what it is.
I know it seems counter-intuitive, but brighter minds than mine have proven that over time, investing a portion of your money in foreign stocks reduces the overall volatility of your equity holdings. The thing to keep in mind is we're not talking about emerging markets such as Thailand and Russia!
Have you ever eaten at Burger King? It's got a foreign parent company ? Diageo (NYSE: DEO), which also owns such well-known brands as Guinness, Smirnoff and Johnny Walker. And would you write off one of the most profitable food companies in the world just because its name is "Nestle?"
Using your criteria, you could never invest in Toyota, perennially one of the top names in U.S. auto sales. And you'd have to scratch Chrysler from the list, too, since it's now owned by Daimler of Germany.
Don't write off perfectly good, solid companies just because their headquarters happen to lie outside America's borders. Some of the most successful firms in the world are "foreign." The important thing to understand is that while the financial markets of the developed world sometimes move in the same direction, often, they do not. The theory behind geographical diversification is that if U.S. market is zigging, European markets could be zagging. Even when you take currency risk into account, the net effect is that this lowers the fluctuations of your overall portfolio.
But I would certainly leave foreign stock selection to a pro and invest via a mutual fund. By the way, do you know the a difference between a "global" fund and an "international" one? (See below.)
I disagree that investing is gambling-- unless you define anything less than a "sure" thing as a gamble. I hardly think Warren Buffet or Sir John Templeton would describe themselves as "gamblers."
Answer: A "global" fund invests in both U.S. and foreign securities and the mix is generally 60%-40%. A mutual fund that calls itself "international" invests only companies located outside the United States.
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The views expressed in this article are those of Ms. Buckner or the individual commentator, and do not necessarily reflect the views of Putnam Investments Inc. or any of its affiliates. You should consult your own financial adviser for advice regarding your particular financial circumstances. This article is for information only and is not an offer of the sale of any mutual fund or other investment.