Investing Mistake: Too Many Eggs in One Basket

in Stock Market

I am reading Larry Swedroe’s book Think, Act, and Invest Like Warren Buffett: The Winning Strategy to Help You Achieve Your Financial and Life Goals (I will be writing a review about it soon), but an excellent point made in the book is not putting too many eggs in one specific basket, and it was an investing mistake that I made in my younger days.

investing mistake

One of the biggest investing mistakes I made while working for Nortel was that I was far too heavily invested in the company. Simply put:

  1. I was receiving a salary from the company, and that was my primary investment with them
  2. Bought Nortel stock as part of a stock purchase plan (where the company kicked in a $1 for every $2 you put in).
  3. Had a few stock options (no, nothing of great value but it was there)
  4. My Disability Insurance was with Nortel (I didn’t know this one at the time, turned out to be a very bad thing for some very unlucky folk)
  5. My Pension was with the company (again, I thought the pension was a safe thing, turned out that was not the case)

All of those eggs sitting in one basket is a very risky thing. I was betting on Nortel for my Present (salary), Future (Pension), Health and Safety (disability) and my savings (Stock), which was way too damn much (and yes I paid dearly for it).

At the time a few smart folks said things to me about being too vested in one Company, but in the late 1990’s, who thought it was all going to come crashing down? Who indeed! Did someone say “too big to fail”?

What Should I Have Done ?

No matter what, I should have divested myself in some fashion. Ideally I should have:

  1. Sold some or most of the stock and put it in Index Funds, Bonds or GICs, to lower my exposure there
  2. Couldn’t do anything about the options, the only time they were above water it was only for about $350
  3. Used my savings and RRSPs to diversify where my money ended up

Now, I work for the Federal Government. I am highly invested in them for about the same list as above (but no stock or stock options). I have divested in some ways with RRSPs, so if anything happens to my pension I do have some retirement savings.

Do you have too many eggs in your employers basket? This could be a lethal investing mistake in your financial life.

{ 10 comments }

  • Denis March 21, 2013, 1:37 AM

    I guess Nortel did not make cars! Could have gotten a bailout if they did! Too big to fail indeed. I had applied to get a job there just before things tanked. Glad I did not get in.

    Reply
  • Bet Crooks March 20, 2013, 7:46 PM

    This is freaky! I wrote a post about this on the weekend, and put it up today. I swear I didn’t read yours till later. I can show you the revision dates if you care to see them.

    I have a relative who dodged the Nortel bullet strictly by accident and the lesson stuck with all of us in our family ever since. When both my husband and I worked for the same major company, we kept an eye on our diversification just because of Nortel. We had way too many opportunities to end up with most of our money in the one stock. Even now, we don’t buy any stocks in that sector (even the ones that our better than the company where my husband works) because we are still over-weighted in that area.

    Reply
    • bigcajunman March 20, 2013, 8:05 PM

      I lifted the idea from Larry Swedroe, so no worries about using the same thematic concept.

      Reply
      • Bet Crooks March 20, 2013, 8:16 PM

        Thanks for understanding. I saw this happen with a children’s fiction writing course once. Two people who didn’t know each other both brought in a ms to critique one night and the stories were almost identical. I didn’t know it could happen in blogging, but I guess it does. Luckily only my mother reads my blog, so it shouldn’t cause too much confusion to readers.

        And I’m sorry you got caught in the Nortel crisis. My relative is still working at the high tech company he got “sold” to but it’s been a constant roller coaster about whether their design/lab will stay open or not. They’re a very small part of a large company that is almost all in Europe and the States. Frankly the government is probably a more stable employer even with all the recent cuts and layoffs.

        Reply
  • My Own Advisor March 20, 2013, 7:41 PM

    Good post BCM.

    I have my pension with my employer, and benefits with them, but that’s it. Everything else I count on me because it’s where the buck stops.

    Reply
  • The Blunt Bean Counter March 20, 2013, 4:29 PM

    BCM,

    Although I cannot provide specific investment advice in my capacity as a CA, I can tell clients they should speak to their investment advisor because they have in my opinion too great a concentration in one stock, typically, where they work. I have had this discussion on numerous occasions, especially with those who work for the banks and telecommunication companies. Although the clients will acknowledge having all their eggs in one basket, most still never diversify. It is as if they have blinders in respect of their employer if they consider them a pillar of corporate society. They should talk to you or someone who worked for Kodak. The funny thing is that most of these clients despite going against conventional wisdom and taking a huge risk in my opinion have done very well over the years, so shows what I know. The best success I had was a client who had shares in a volatile stock and was getting new stock options. I told them they should consider cashing their current options. They said no way, the stock was going higher. I said, great your new options will be in the money. They said they would consider it. I told them to talk to their advisor. Luckily their investment advisor was in agreement with me and persuaded them to sell their initial options. One year later the stock had dropped over $50 dollars and was now pretty much a penny stock. That client does not have a visceral hatred of their accountant 🙂

    Reply
    • bigcajunman March 20, 2013, 4:45 PM

      True, but hatred of accountants in former Nortel employees is completely understandable (IMHO).

      Yes, there are High Tech folks who were very sensible with their options, and took the money when it was there, and then diversified (including a financial blogger we know), but the vast majority of them keep thinking about the possible future value of money, instead of taking the current value and running. I fell for the same Siren’s song of “it is going to go higher, it always has!”, those that took the money and run I admire (and loath at the same time).

      Reply
  • David Leonhardt March 20, 2013, 7:18 AM

    My brother was the same. In fact, I suspect that most Nortel employees were in the same boat. Nortel was too big to fail, right?

    Reply
    • bigcajunman March 20, 2013, 7:38 AM

      I had more than one co-worker say, “If Nortel fails, the Government will have to bail us out, we are just too important”, guess we were wrong?

      Reply

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