Word of the day: Buyout

[smittycrusher]

Delta and Georgia Power sure are keeping me busy with these voluntary buyouts! It is actually quite scary as I am helping employees of these two firms decide whether or not take the deal and walk. Every single person that I have done illustrations for has WAY too much of their retirment in their own company's stock. Have people forgotten about Enron, Worldcom, Wachovia, Citi, BOA, Wamu, or any other bank in 2008? The sad thing is that very little of this stock that they are holding is restricted. I guess it is just pride since everyone seems to have resistence to this point when we bring it up.

These two buyouts are not going to help our above national average and still rising unemployment rate. Let's hope that the housing markets hurry up and stabilize.

rant off,
Smit

 

[LDowney]

... Every single person that I have done illustrations for has WAY too much of their retirment in their own company's stock. Have people forgotten about Enron, Worldcom, Wachovia, Citi, BOA, Wamu, or any other bank in 2008? ...

Scott,
I don't work for either of these companies, but I know how easy it is to happen. In my case, the company matching contributions to the 401k is in company stock only. Also, due to rules about how long the matching stock had to be retained plus no ability (option) to self manage our 401k's (until recently), the amounts quickly add up. Then there is the fact that I am not an an investment/stock market guru, so this enginerd struggles to make the right choices as timely as they should be made (i.e., there are a lot of reasons why I am not a rich man).

Glad to hear that you can sort it out and explain to these people so they can make their choices. Keep the rants coming ... maybe you will educate me some.

 

[pillguy]

Let me state, I am not a professional investor. I got into investing late in the game the year... 2000 (divorce, CS, no money in my earlier years), so I am playing catchup now....... I always remember what Clark Howard said, no more than 12% of company stock in your 401k. Currently, I have about 5% in company stock and I am still unhappy with the returns.

I did poorly in the 01-03 market and did not monitor my investments, and things improved for the next two years.
My lesson learned, monitor your 401k share amounts on a spreadsheet and adjust quarterly as needed. I have found that dollar cost averaging in todays market is less than ideal as several have said it took them several years to make up the losses.
Unfortunately, I have to sit vanguard funds as they have taken a significant beating in 2 yrs I have held them. Ugh....

A

Scott,
I don't work for either of these companies, but I know how easy it is to happen. In my case, the company matching contributions to the 401k is in company stock only. Also, due to rules about how long the matching stock had to be retained plus no ability (option) to self manage our 401k's (until recently), the amounts quickly add up. Then there is the fact that I am not an an investment/stock market guru, so this enginerd struggles to make the right choices as timely as they should be made (i.e., there are a lot of reasons why I am not a rich man).

Glad to hear that you can sort it out and explain to these people so they can make their choices. Keep the rants coming ... maybe you will educate me some.

 

[smittycrusher]

Scott,
I don't work for either of these companies, but I know how easy it is to happen. In my case, the company matching contributions to the 401k is in company stock only. Also, due to rules about how long the matching stock had to be retained plus no ability (option) to self manage our 401k's (until recently), the amounts quickly add up. Then there is the fact that I am not an an investment/stock market guru, so this enginerd struggles to make the right choices as timely as they should be made (i.e., there are a lot of reasons why I am not a rich man).

Glad to hear that you can sort it out and explain to these people so they can make their choices. Keep the rants coming ... maybe you will educate me some.

Larry,

I completely understand how easily it can/does happen. It even happened to some advisors in my office with Citi over the past year. They were taking full advantage of the 25% discount thinking that it was a no-brainer. In their case these discounted purchases come with restriction periods and getting a 25% discount on a stock that goes from $54 to $4 over a period of time doesn't really help (they had to sit back and watch it plummet as they could not sell at any time). These guys now have to work 5-10 years longer than they had planned (or not planned I guess). I have had some discussions with colleagues of yours Larry and I know what you are referring to with your particular options for your retirement accounts. Fortunately the vast majority of corporations understand the liability they carry if they are not providing a self-directed option within their platforms. It is very common for companies to match contributions with company stock. It is then very important for each recipient to make sure that match is invested to their individual needs. Since Enron and WorldCom, the government has allowed for in-service distributions from company accounts. This is where an employee can take a certain amount of their employer sponsored retirement account (401(k), 403(b)) and move it to an IRA without penalty...while still working for the company. The purpose to allow employees the freedom to get their money invested in any vehicle they choose.
For those with a lot of company stock, a net unrealized appreciation strategy may save them a substantial amount in taxes for the rest of their life. This is a pretty intricate strategy that most don't know about (the IRS sure isn't going to broadcast it) yet is fairly easily executed and can actually reward someone for the mistake of accumulating too much company stock.

I have about 5% in company stock and I am still unhappy with the returns.

I did poorly in the 01-03 market and did not monitor my investments, and things improved for the next two years.
My lesson learned, monitor your 401k share amounts on a spreadsheet and adjust quarterly as needed. I have found that dollar cost averaging in todays market is less than ideal as several have said it took them several years to make up the losses.
Unfortunately, I have to sit vanguard funds as they have taken a significant beating in 2 yrs I have held them. Ugh....

A

You said quite a bit in just a few words there. I will preface with this: every single person/family out there has a different story and unique needs (e.g. last year we told a client that is worth $300 million that they were going to run out of money ). 5% company stock may or may not be right for you, I have no clue. My opinion on company stock in general is that employees should not also be shareholders...think about that for a little bit and then feel free to badger me offline for my reasons. I am still a believer in dollar cost averaging. Heaven forbid we start accumulating cash and then try to get in and out of the market at the right time periods. DCA is a time tested way to ensure that you are taking full advantage of down markets while limiting your share intake during up markets. The only way to fully DCA is to keep at it during times like these. DCA in today's environment is like a seven year old eating vegetables. They don't want to eat them since they don't taste good and the seven year really has no idea how much good the vegetables do for them. No how you invest in these markets is the larger challenge. Where do you put the money? Do you stick with the same plan you have always had? Do you abandon one thing to get into another? The vanguard funds that you hold be very well positioned to take advantage of the next bull market, then again, they may not be. If they aren't, I would not hesitate to replace them with something else that may get you back to even (or higher) more efficiently. Monitoring constantly is very necessary when it comes to money. Unfortunately, I think most fail to monitor close enough. Watching it too closely can also lead to poor emotional actions as well.

Thanks for giving me a sounding board. I would prefer spending my lunch break doing this than listening to a wholesaler try to convince me how great a variable annuity is for my clients.

 

[LDowney]

Larry,

I completely understand how easily it can/does happen. It even happened to some advisors in my office with Citi over the past year. They were taking full advantage of the 25% discount thinking that it was a no-brainer. In their case these discounted purchases come with restriction periods and getting a 25% discount on a stock that goes from $54 to $4 over a period of time doesn't really help (they had to sit back and watch it plummet as they could not sell at any time). These guys now have to work 5-10 years longer than they had planned (or not planned I guess). I have had some discussions with colleagues of yours Larry and I know what you are referring to with your particular options for your retirement accounts. Fortunately the vast majority of corporations understand the liability they carry if they are not providing a self-directed option within their platforms. It is very common for companies to match contributions with company stock. It is then very important for each recipient to make sure that match is invested to their individual needs. Since Enron and WorldCom, the government has allowed for in-service distributions from company accounts. This is where an employee can take a certain amount of their employer sponsored retirement account (401(k), 403(b)) and move it to an IRA without penalty...while still working for the company. The purpose to allow employees the freedom to get their money invested in any vehicle they choose.
For those with a lot of company stock, a net unrealized appreciation strategy may save them a substantial amount in taxes for the rest of their life. This is a pretty intricate strategy that most don't know about (the IRS sure isn't going to broadcast it) yet is fairly easily executed and can actually reward someone for the mistake of accumulating too much company stock.



You said quite a bit in just a few words there. I will preface with this: every single person/family out there has a different story and unique needs (e.g. last year we told a client that is worth $300 million that they were going to run out of money ). 5% company stock may or may not be right for you, I have no clue. My opinion on company stock in general is that employees should not also be shareholders...think about that for a little bit and then feel free to badger me offline for my reasons. I am still a believer in dollar cost averaging. Heaven forbid we start accumulating cash and then try to get in and out of the market at the right time periods. DCA is a time tested way to ensure that you are taking full advantage of down markets while limiting your share intake during up markets. The only way to fully DCA is to keep at it during times like these. DCA in today's environment is like a seven year old eating vegetables. They don't want to eat them since they don't taste good and the seven year really has no idea how much good the vegetables do for them. No how you invest in these markets is the larger challenge. Where do you put the money? Do you stick with the same plan you have always had? Do you abandon one thing to get into another? The vanguard funds that you hold be very well positioned to take advantage of the next bull market, then again, they may not be. If they aren't, I would not hesitate to replace them with something else that may get you back to even (or higher) more efficiently. Monitoring constantly is very necessary when it comes to money. Unfortunately, I think most fail to monitor close enough. Watching it too closely can also lead to poor emotional actions as well.

Thanks for giving me a sounding board. I would prefer spending my lunch break doing this than listening to a wholesaler try to convince me how great a variable annuity is for my clients.

Scott,
You hit a serious void in me... Your explanation struck home to me like Maxwell's free space equations and Householder decomposition theorem did for me in school. I will ask my accountant, Carolyn, to read this string and explain it to me. Normally, I make the money; she monitors & analyzes it.

Thanks