Talking With My Sister About Investing and Risk

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leo383
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Talking With My Sister About Investing and Risk

Post by leo383 »

My sister is 48yo and works for a major well-known company whose stock has gone from $70 to almost $900 the last 5 or so years.

She makes a good income, lives in NYC by herself, and needs a firm retirement plan. She has some stock options with the company. She respects my knowledge of finance and investing. I am a Boglehead, and always recommend diversification, indexing, and LBYM.

The problem is her workplace. Everyone she works with is convinced that they have Bentleys and mansions in their future, and that the company's stock will grow to the sky. Just about all of them have all of their money in the company stock, and it has been GREAT for them. The company stock has made many of them wealthy, at least on paper.

Is there any way to convince her of the risks inherent in this? I come across as hopelessly fuddy duddy, and just look at the mediocre returns that a balanced approach get compared to the 15 bagger the company stock has been.

Or should I just accept that I can't change the way she thinks?
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SamGamgee
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Re: Talking With My Sister About Investing and Risk

Post by SamGamgee »

give her a book and don't bring it up again if she doesn't.
LondonJimmy
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Re: Talking With My Sister About Investing and Risk

Post by LondonJimmy »

How about pointing her to this forum and simply explaining to her the risks inherent in a single firm. Explain how so many 'professionals' underperform the market and why. Explain how the chances are that her firm will not earn above avergare returns and she will not be compensated properly for the amount of risk she is taking. Chances are the massive growth and returns have already been experienced. She should thank her luck and now invest her large amount in indexes and bonds. A properly diversified portfolio should grow well and provide her with sufficient income in her retirement when she switches to more bonds. If she wants to take a chance and gamble then fine, provided she understands the risks and that she might lose it all. If she simply wants to invest and lead a comfortable lfie then you know what to do.
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InvestorNewb
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Re: Talking With My Sister About Investing and Risk

Post by InvestorNewb »

Eric Schmidt, Google's former CEO, is in the process of selling $2.5B worth of his stock (about half) in the company.

Maybe sell half and keep half.
My Portfolio: VTI [US], VXUS [Int'l], VNQ [REIT], VCN [Canada] (largest to smallest)
Andyrunner
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Re: Talking With My Sister About Investing and Risk

Post by Andyrunner »

Give her a good article or case study on Enron and it's employees retirement funds?
Grt2bOutdoors
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Re: Talking With My Sister About Investing and Risk

Post by Grt2bOutdoors »

Her fellow colleagues may be onto something - the internet medium is like Radio Corporation of America was back in the early 20's. However, no matter how promising radio and tv was back then, RCA did not escape the wrath of the Great Depression and market crash of '29 and '32 - read The Great Depression; A Diary - it's a real eye-opener. Not saying it is going to happen again. I'm assuming your sister has been there awhile and has accumulated a decent sum - have her take a good look at Apple; went to 700, where was it yesterday, where will it be today, especially after page one of the WSJ hit the stands this morning.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Call_Me_Op
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Re: Talking With My Sister About Investing and Risk

Post by Call_Me_Op »

Give her a plot of Enron's stock price as a function of time (on a linear scale).
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fulltilt
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Re: Talking With My Sister About Investing and Risk

Post by fulltilt »

leo383 wrote:Is there any way to convince her of the risks inherent in this? I come across as hopelessly fuddy duddy, and just look at the mediocre returns that a balanced approach get compared to the 15 bagger the company stock has been.
Don't try to "convince" her of the risks. If you inform her of the risks, then she should make her own decision.

The future is uncertain. Maybe all of her coworkers are right, and YOU are wrong?
Walk a single path, becoming neither cocky with victory nor broken with defeat, without forgetting caution when all is quiet or becoming frightened when danger threatens. -- Jigoro Kano
Novine
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Re: Talking With My Sister About Investing and Risk

Post by Novine »

"The future is uncertain. Maybe all of her coworkers are right, and YOU are wrong?"

What does that have to do with having all of your assets tied up in company stock? The performance of the stock doesn't change the fact that it's incredibly risky to have all of your retirement assets tied up in one company's stock. By your own statement, the future is uncertain. Diversification is a hedge against that uncertainty.
Sidney
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Re: Talking With My Sister About Investing and Risk

Post by Sidney »

SamGamgee wrote:give her a book and don't bring it up again if she doesn't.
this
I always wanted to be a procrastinator.
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bottlecap
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Re: Talking With My Sister About Investing and Risk

Post by bottlecap »

Call_Me_Op wrote:Give her a plot of Enron's stock price as a function of time (on a linear scale).
Yeah, my wife's great great aunt (or something like that) worked as a secretary with Enron decades ago. She left quite a lot of the stock to the family members, so much so that it surely consisted would have been a substantial part of the retirement plans for everyone receiving shares (if they had such a plan). All of the shares stayed in the family and, obviously, it's all gone now. Easy come easy go, I guess. This company doesn't have to get involved in fraud to have this happen, either. Markets change and companies go bust for legitimate reasons every day.

I don't know how much you sister has in options, but it might be time to exercise some of them (50%+?). Why keep your eggs all in one basket? Greed is almost always negatively rewarded...

Good luck,

JT
pkcrafter
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Re: Talking With My Sister About Investing and Risk

Post by pkcrafter »

Your sister is violating a fundamental rule of smart investing. Not only does she have specific stock risk, which is not compensated, but she also works for the same company that she is fully invested in. This further concentrates risk because if something happens to the company she loses all of her retirement money and her means of paying the monthly bills at the same time. It's dumb investing 101.
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
Fallible
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Re: Talking With My Sister About Investing and Risk

Post by Fallible »

leo383 wrote:My sister is 48yo and works for a major well-known company whose stock has gone from $70 to almost $900 the last 5 or so years.

She makes a good income, lives in NYC by herself, and needs a firm retirement plan. She has some stock options with the company. She respects my knowledge of finance and investing. I am a Boglehead, and always recommend diversification, indexing, and LBYM.

The problem is her workplace. Everyone she works with is convinced that they have Bentleys and mansions in their future, and that the company's stock will grow to the sky. Just about all of them have all of their money in the company stock, and it has been GREAT for them. The company stock has made many of them wealthy, at least on paper.

Is there any way to convince her of the risks inherent in this? I come across as hopelessly fuddy duddy, and just look at the mediocre returns that a balanced approach get compared to the 15 bagger the company stock has been.

Or should I just accept that I can't change the way she thinks?
If she respects your investing knowledge then maybe you could present it differently. It's not clear how you're presenting your information to her now, but if it's just general suggestions, you could try writing down in general terms a simple investment plan like the 3-fund portfolio. She could still keep some company stock and watch it grow (or not) and talk about it with her co-workers, but she would have at least a start on diversification. In other words, maybe being more specific would help, making it easier for her to make the transition, to take that first step. If she seems open to that, even let her know how to contact a fund company, who to talk with, etc.
"Yes, investing is simple. But it is not easy, for it requires discipline, patience, steadfastness, and that most uncommon of all gifts, common sense." ~Jack Bogle
tomd37
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Re: Talking With My Sister About Investing and Risk

Post by tomd37 »

Another example of a company and its stock gone bad is Northern Telecom also known by the names Nortel Networks and Nortel. It was a Canadian telecommunications company founded in 1895 as Northern Electric. It did exceptionally well in the 1980s, 1990s, and up to about 2002 when the tech bubble burst. That event, along with some improper financial decisions, led it into bankruptcy around 2006 or so. I saw the stock drop from a high of about $88.50 to a low of $0.43 prior to them declaring bankruptcy. Tens of thousands of employees lost millions of dollars and most, if not all, lost their jobs and retirement benefits. :(

A rule of thumb I have always heard is to have no more than 10% of your investments with your employer's stock.
Tom D.
nodenuff2
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Re: Talking With My Sister About Investing and Risk

Post by nodenuff2 »

Think WorldCom great company with great stock growth until it fell apart. Upper management lost all and went to jail. Common folks just lost all. Great companies fall aprt all the time. Cash in enough that it wll set her up for life or fund her retirement. I would not want more than 25%of investible assets to be there. Well actually there migh be a short list of comapnies I would trust with more if I worked there.
2014 No. 42 2015 No.342 2016 No. 6 2017 238 2018 no. 175 2019 no. 144 6 year average 157.83. Proves I am just an average investor.What do I know? "Good bless America land that I love..."
John3754
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Re: Talking With My Sister About Investing and Risk

Post by John3754 »

If someone needs convincing that it's inheriting risky to have all your proverbial eggs in one basket then I don't know what you could possibly do to help them.
Dandy
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Re: Talking With My Sister About Investing and Risk

Post by Dandy »

In today's competitive environment a blue chip can turn into a cow chip overnight. All sorts of companies are booming and busting like never before. So, keeping your investment and employment tied up with once company is extremely risky. Maybe you can have her cut back on company stock and agree to make it a fixed percent of her portfolio. If/when her company goes bust she can buy their toys for cents on the dollar. If not, she will still have sizable assets. Good luck
nodenuff2
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Re: Talking With My Sister About Investing and Risk

Post by nodenuff2 »

Another thought to give her. It is only truly GREAT when it is converted into real dollars and diversified. Rest is just numbers on a page.
2014 No. 42 2015 No.342 2016 No. 6 2017 238 2018 no. 175 2019 no. 144 6 year average 157.83. Proves I am just an average investor.What do I know? "Good bless America land that I love..."
Jim180
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Re: Talking With My Sister About Investing and Risk

Post by Jim180 »

Tell her that even Warren Buffett doesn't own just one stock.
suming
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Re: Talking With My Sister About Investing and Risk

Post by suming »

My husband had a similar situation and I posted a thread here. Somebody suggested the documentary film 'the smartest guys in the room' Enron so I borrowed it from our local library. It worked! He got rid of 50% of his company stock.
LondonJimmy
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Re: Talking With My Sister About Investing and Risk

Post by LondonJimmy »

nodenuff2 wrote:Another thought to give her. It is only truly GREAT when it is converted into real dollars and diversified. Rest is just numbers on a page.

Really? Then what do you do with the dollars? Dollars are a terrible investment and loses value.
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Methedras
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Re: Talking With My Sister About Investing and Risk

Post by Methedras »

Really? Then what do you do with the dollars? Dollars are a terrible investment and loses value.
nodenuff2 specifically stated that they should be converted into real dollars and then diversified.
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DaleMaley
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Re: Talking With My Sister About Investing and Risk

Post by DaleMaley »

The guys that ran the company Long-Term Capital Management thought they were geniuses.

They had 2 Nobel Price winners and some of the most experienced traders on Wall Street.

Here is what happened to them in only 4 years:

Image

From the book, When Genius Failed: The Rise and Fall of Long-Term Capital Management

http://www.amazon.com/When-Genius-Faile ... ius+failed
Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. – Warren Buffett
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