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nelsonal's Journal: 401 (k) plans and Company Stock 5

Journal by nelsonal
I just ran across this article today. So I thought I'd bring it up to anyone who might come across this journal. It is terribly unwise to keep an outsized portion of your savings in company stock, for two reasons. First you are not nearly diversified well enough. As an example, if you had two returns over 10 years, one gets 5%/year and the other an average of 7% with 25% std deviation (pretty low compared to big technology stock st deviations (MS had 54% stdev over the last 14 years)). I used 43%, -15%, 35%, -17%, -10%, 25%, 20% -15% -20% and 25%. Which do you think results in the most money after 10 years?
The 5% return. The negative returns throw you further from the geometric mean [nth root of the product of(1+rn)] your geometric return is only 4.5% for the second set of returns. That and the application of correllation to returns is the basis of modern portfolio theory.
The second reason is that if something bad happens to the company you lose your job and your nest egg if it is entirely in company stock.
So, ASAP you should go log into your 401k administrator's [plan sponsors] page (or call if they are out of date) and find out what you are invested in, and speak with a professional (or do some research yourself) on how to allocate your assets to assure you a more prosperous retirement.
That is all, enjoy your weekend, but please go look at your 401k on monday.
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401 (k) plans and Company Stock

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  • I know this is not unique, but my parents have both worked for Qwest since before AT&T was broken up into the baby bells. For their generation, telecom stocks were blue chips - not huge money earners, but no risk. Deregulation in 1996 changed that, but they didn't know it. They kept their retirement invested in Qwest. So when the stock fell from around $60 a share in 2000, to around $6 in late '02, they had their 401(k)'s reduced by 90%. They were both close to retirement. My father was about to retire,
  • If you have the option, invest significantly in Bonds.
    In a Bull Market they don't earn as much but after the last bubble burst I noticed none of my market funds that all stock were making any money.

    The risk with investing in bonds is inflation will kill their value. Bonds are basically loaning money to people. You make your money back with the interest. If inflation devalues the money beyond the interest, you lose. This is unlikely to happen in the American economy, but almost nothing would suprise me with
    • You also have to be concerned with interest rate increases. A bond pays contractual payments, and the current price is a discount of those contractural payments. If that discount rate rises the current value of those payments falls. Most spreadsheets have a function called price that will let you see how this works. Check how much the price falls if the discount rate goes from 5% to 7% (almost 25%). You will get all your cash back with interest if you hang on to the bonds to maturity, but in a fund you

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