Investment diversification.

I had this novel thought the other day.
For as long as I can remember, I’ve heard nothing but “diversify, diversify, diversify” from every investment advertising TV commercial and radio ad I’ve ever heard. That seems to be the conventional wisdom, spread your money out wide and thin so if anything bad happens to one or more investments, your personal hit will be small.

And there are many historic examples of bad calls and poorly placed investments where people have suffered miserably, because they didn’t diversify.

Enron comes quickly to mind. Here’s, (or rather, there’s) a company that managed to convince a way too large portion of its employee population to invest their retirement money in the company’s stock.

Breaks the first 3 rules of investing: 1) Diversify, 2) Diversify, and 3) Diversify. (Rule number 4 by the way, applies to all facets of life: if anything weird happens, hit the clutch.)

So when enron quickly tanked, so did the retirements of many of its employees. Somebody at enron should have known better, particularly somebody in HR, but that’s history, and we should learn from it.

Enron makes a particularly interesting example because it highlights a similar non-diversification problem. Pensions. Now if you start working at a job after the 2008-2012 era, you’re likely to not get a pension anyway, so this won’t apply to too many people anymore, but pensions create a significant diversification problem for long term employees.

Imagine you start working at GM in the 60’s. There you are, young and in your 20’s and you start making widgets on the assembly line at GM. You power through your best years making the best damn widgets known to man, slowly accruing equity in a fantastic pension plan.

When you retire, you’re going to be set for the rest of your life.

Then 2008 comes along, near retirement time, and all of a sudden, GM finds itself with lots of really expensive unfunded pension obligations because the children of the greatest generation chose to shove off those problems to the future, and the future has finally arrived.

I’m far from the first to preach this particular song, but what I haven’t heard anybody suggest is that maybe everybody should be diversifying their pensions. I don’t remember the details of what happened to GM, quick reading tells me they’re trying to buy everybody out, but haven’t actually screwed anybody over yet, but if you were that GM employee in the 60’s maybe sometime in the 70’s you should have gone to work for ford.

They’re in the same boat as GM, but you can still diversify and limit your risk.

Then in the 80’s you could have worked for honda. in the 90’s you could have moved to toyota, and in the 2000’s moved to hyundai. I don’t know if any or all of those companies offer pension plans, but the idea is that if you stay at one company forever, and start banking on that one single point of failure for your retirement, you may be waiting decades to find somebody is going to screw you over at the last minute.

It’s an interesting argument for why you shouldn’t stay at one job for a long time. Diversify your investments, including your pension.


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