Launa and I recently watched an old movie classic, Frequency. In this movie the main player finds a way to communicate with his friend who is living 30 years earlier. Among the advice he gives his friend of the past is to remember one word, “Yahoo.” The friend is confused but as the movie ends, this same friend has become very wealthy and is shown driving a car whose license plate reads “I Yahoo.” Of course the irony of the movie was that just as it was being released in early 2000, Yahoo’s high flying stock was crashing down with the dot.com bubble collapse. Too bad the guy from the future didn’t alert his friend of when to sell.
When you consider the great stock disasters of the past, names like Worldcom, Enron, Lehman Brothers and Washington Mutual come to mind. We make fun of these companies today, but often forget that each was once an icon in their field. Worldcom was a huge success until antitrust law investigations exposed one of the biggest corporate frauds in history. Lehman Brothers was respected and considered by some too big to fail, just before their demise brought the financial world to its knees. Washington Mutual became the biggest bank failure in history after being one of the nation’s most successful banks. And finally Enron, the iconic symbol of corruption and failure, was named by Fortune magazine, not once but several times, "America's most innovative company.”
So what company do you own in your portfolio that you feel is too big to fail? Could such a company even exist? One mistake investors make is to own too much of a single company. This can be especially true if you own a significant amount of stock in the company you get your paycheck or your pension from. One of the great tragedies of the Enron failure was that so many of its employees and pensioners had large portions of their retirement also tied up in the company stock. I run into this same situation with retirees quite regularly, which can result in the classic case of having too many eggs in one basket, and experience teaches us that there is no one corporate basket too big to fail.
As we study stock market history we find many examples of failures of once great companies. These should remind us that no matter how good it may look today, be very cautious about having too much of your retirement dependent upon a single company. Remember that historic corporate failures usually became historic because the thought of failure was so out of the question at the time.
Look at your portfolio and carefully consider every position. Ask yourself a simple question. What would happen to me if this single company were to fail? If the answer to that question scares you, I would consider reducing the position regardless of how much I loved the company.
Hi, I'm Dan. I'm a CFP® Professional.
Securities and advisory services offered through Commonwealth Financial Network®.
Member www.finra.org / www.sipc.org , a Registered Investment Advisor. Wyson Financial, 375 E Riverside Dr, St. George, UT 84790
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