Diversification Isn’t Just for Clients

We at Raffa Wealth Management preach investment diversification.  By diversifying your investment portfolio broadly and efficiently it helps reduce portfolio volatility and keeps your investment portfolio on a road towards its goal.  However, not all those in the financial industry have practiced this time tested formula for success.

Recent research by Bloomberg has shown that employees of five of Wall Street’s largest banks keep a significant portion of their 401(k) retirement portfolios invested in company stock.  The average employee invests roughly 13.0% of their retirement portfolio in their firm’s stock.  As a result, the group collectively lost over $2 billion last year as financial firms stock fared poorly.  Wall Street bank employees hold only slightly less company stock than the general population with the option to invest in their company, according to Callan Associates Inc. – the general population holds 13.4%.  

These supposed financial experts ignored one of the basic tenants of investing by allocating heavily to one very specific investment, and suffered the consequences.  The allocation is doubly bad in this situation as their human capital, their future earnings, are also tied directly to the firm.  If the company does not perform well they are less likely to receive raises or bonuses just as the firm’s stock price is likely to fall.  While this specific loss scenario deals with employees of the 5 largest Wall Street banks, the same problems can befall those in other fields that have a large amount of their portfolios tied up in company stock, or a concentrated position in general.

This is a clear example of what not to do.  Developing a total portfolio investment allocation, well diversified across asset classes and periodically reviewing and rebalancing to that target keeps you on the path to investment success.

Index Performance                                     June         2Q         YTD             

US Stock (Russell 3000)                                  3.92%      -3.15%    9.32%                  
Foreign Stock (FTSE AW ex US)                     5.85%     -7.51%      3.16%                
Total US Bond Mkt. (BarCap Aggregate)       0.04%      2.06%     2.37%                  
Short US Gov. Bonds (BarCap Gov 1-5 Yr)   -0.05%      0.56%     0.45%         
Municipal Bonds (BarCap 1-10yr Muni)        -0.08%      1.27%      1.81%          
Cash (ML 3Month T-Bill)                                 0.01%      0.03%     0.04%

There is no guarantee that any investment strategy, including those described here, will be successful. Any investment or investment strategy can lose money. Past performance does not guarantee or predict future results. You should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice from Raffa Wealth Management, LLC. This information was gathered from reliable sources, but we cannot guarantee accuracy. Indexes do not reflect the fees associated with actual investments and such fees would reduce the performance illustrated. Source: FMG Suite, LLC.
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