With more and more multi-nationals based in Ireland, share options have become a common way for these companies to reward their staff. As well giving staff shares in large global companies (often free), it also acts as golden handcuffs because if they leave, the forego any unvested shares, which can often run into hundreds of thousands of euro.
In saying that, I read a blog recently about a post that was put on Reddit. The poster’s dad had accumulated $1.8m in GE shares over his working lifetime, accounting for 90% of his stock portfolio. In the time between the Reddit post went up and the blog was written, GE had fallen by 44%. The just about to retire dad had seen his $1.8m fall by $792,000 to $1,080,000. To rub salt into the wounds, the attractive 4% yield was halved, so his dividend fell from $72,000 to $35,000.
The golden rule is to never be reliant on the same company for your salary and your savings. Nowhere is this more evident than in the case of Bear Sterns and Lehman Brothers. In the years before the credit crunch recession, Wall Street banks paid out massive bonuses to their staff. It was seen as a sign of loyalty that you reinvested your bonus into company stock. When these banks went bust, not only did you lose you job but all the stock that you owned was not worthless too.
These banks were massive players on the global market, so don’t think that it can’t happen to your large multi-national employer.
People don’t like admitting to backing a losing horse. That is why so many investors hold onto poor assets instead of cutting their losses. Selling an asset at a loss is admitting that you backed the wrong horse. Some might argue that GE have been around for a long time and it isn’t their first rough patch and they will be right. But while you are waiting for their share price to recover, there are plenty of other companies that are growing at a faster pace.
Diversification is the principle of spreading your investment risk around. For example, holding stock in BMW (luxury goods) and Colgate (consumer goods), you are taking less risk. If there is a recession, people may stop buy new BMW’s but they will continue buying toothpaste. Now do this across multiple industries and regions and you get a real mix. The returns may not be as explosive as seeing the value of one stock going through the roof but then the downside isn’t as dramatic (higher chance of entire savings being worth zero).
Having a diversified portfolio of global stocks isn’t as exciting as seeing all the ups and downs on just one stock on an app on your phone. But the goal should be about building wealth over the long term and not taking unnecessary risks.
If you have any questions, send me an email at steven@bluewaterfp.ie