When a blue-chip bet goes bust
It seemed like a good idea - buying shares of the big company you worked for. And now you're paying for it.
NEW YORK (Fortune) -- One of the perks of working for a big blue chip company is that employees can often buy its stock at a discount.
But the current economic downturn has battered even the bluest of the blue chips and wiped away venerable names like Lehman Brothers and Wachovia. Heavily vested employees who thought a great name would see them through turbulent times watched their portfolios disappear.
"This is an issue that many of my clients are facing," says Erin Botsford, chief financial planner at the Botsford Group in Dallas, TX. Botsford manages $650 million for corporate executives at blue chip companies.
Betting the farm on a once-sterling name has already ended badly for many investors, and plenty more, who have the bulk of their money in struggling stocks like AIG (AIG, Fortune 500), Citigroup (C, Fortune 500), General Electric (GE, Fortune 500) and Eastman Kodak (EK, Fortune 500), are wondering if they can still bet on blue chips' reputation for coming back.
The short answer is no, says Lew Altfest, a New York City financial planner who works with high-net worth clients.
"Even before this crisis, there have been other blue chip stocks that have blown up. Long Island Lighting went under and it was a blue chip utility stock. Even though everyone believes there's nothing safer than a utility, the company is gone," he says. "It is very important to realize that this is an environment where companies can't hide any of their problems, and that in some cases these issues could really damage the company."
No portfolio should depend on a single stock, according to Altfest. "It's never a good idea to put 100% of your money in any one investment because nobody can say with certainty that there couldn't be a reason why that company won't make a tragic mistake," he says. "You would want to reallocate even if your one stock were outperforming the market."
Botsford says that in good times or bad, no single stock should account for more than 10% to 15% of your total net worth. If it comes back, you'll still own a lot of shares and should fare well, she says. If it tanks, it should be a small enough part of your allocation that it does not wipe you out.
One of the first things an investor can do is to stop putting more money into that stock and put it elsewhere, Altfest advises. Then you don't have to sell in order to start making that company a smaller portion of the portfolio.
Botsford goes as far as to encourage investors to sell anything above the 10% to 15% guideline.
Financial planners warn that now is also the time to start educating yourself as much as possible to be sure you're comfortable with your investments.
"If you're in a stock like Microsoft (MSFT, Fortune 500) or Merck (MRK, Fortune 500) and it's not down more than the average company, and its problems don't seem out of the ordinary for a recession, then it's a good time to diversify," says Altfest. "But if it seems like a doomed investment, as some analysts have called AIG, then you might want to get out all together. That's a decision you have to make."
This is also an opportunity to finally obey the basic rules of financial planning, says Ryan Mack, a financial planner with Optimum Capital Management.
"This is a time when you want to be sure that your portfolio isn't unnecessarily risky, that your allocation makes sense, and that you don't have a lot of personal debt," he says. "You don't have to run away from equities, you just need them to make sense as part of your overall investment plan."