What to do with your Company Stock in the Wake of GE's $184 Billion Collapse
by Trailhead Plan… on May 17, 2018
General Electric has one of the richest histories in Corporate America, and following its story is like listening to an oral history of the 20th century. Its worker training was legendary, and its former CEOs loom larger than life. General Electric products are everywhere, from your lightbulb, to your washing machine, to the engine in a Boeing 777.
Similarly, GE employees and retirees, the individuals who dreamed up and created all these magnificent products, are similarly ubiquitous, together numbering well over half a million individuals. And here is where our story starts, because a large portion of both current and former GE employees owned a significant amount of company stock, and GE’s stock has been absolutely decimated as of late, irreparably damaging the retirement portfolios of countless individuals.
According to the Wall Street Journal, GE is one of the widest held individual stocks by retail investors which makes the following chart hard to stomach.
All in all, GE has lost over $184 billion in market valuation.
The Risk and Reward of Company Stock Ownership
The current predicament of General Electric retirees is a sad tale, yet it is an important lesson for the countless board members, executives, and employees of Corporate America, both current and former, who own the stock of the company they serve.
Participating in your company’s stock ownership plan, via equity compensation like RSU’s or ISO’s, or via a share-purchase plan, can be a fortuitous way to build wealth, especially when the stock is going up. Just ask a Google, Amazon, or Netflix employee how they are doing these days. Yet, what goes up, can also go down, and precipitously at that. As a contrast, just ask former Blackberry, Lehman Brothers, Valeant, or General Electric employees how they are doing.
You see, the 21st century hasn’t been kind to General Electric. In 2007, the company’s financing arm, GE Capital, was almost downed by the Financial Crisis, necessitating a bailout from Warren Buffet’s Berkshire Hathaway. More, as the rest of the industrial world recovered post-2009, GE’s conglomerate business model proved bloated and ineffective, miring the company in troubles and corporate restructuring ever since. More recently, an accounting scandal is drawing the attention of the SEC.
GE’s stock, once vaunted as a cornerstone of any good investment portfolio, is trading in the same price range as it was the summer of 2009. More, though there have certainly been ups and downs, (GE’s stock peaked at nearly $60 at the height of the Tech Bubble in 2000), you could have bought GE for the exact same price it trades at today in 1996. That’s not good.
For more on GE’s troubles, we recommend the following articles:
- GE's Pensioner Needs to find a new job after 40 years at General Electric - WSJ
- GE's Nickel & Diming: Bloomberg
Nothing Goes Up Forever
Everyone feels confident during an economic expansion like the one currently taking place. CEO’s tout all that they have accomplished while helming the corporate ship. Then, they optimistically note the incredible growth opportunities still ahead. Employees feel confident about future raises and job security, and shareholders continue to purchase more and more of the stock. Stock prices continue to rise.
It’s nice, and it feels good. Your net worth has likely expanded significantly due to appreciation in your company’s stock, and is made more and more by company stock) and you know that next year there will be more on the way.
But as the market loves to remind us, nothing lasts forever. In fact, according to research by innosight, company longevity within the S&P 500 index is in decline as creative destruction accelerates in the modern era.
What to do with your Company Stock Holdings
With stock prices at all-time highs, after nearly a decade of economic expansion and bull market gains, we think its an opportune time to review your ownership of company stock. To start the process, here are some lessons that owners of company stock can draw from General Electric’s fate:
Diversify, Diversify, Diversify
If you learn anything from the fate of General Electric shareholders, learn to diversify your investment holdings. In the Wall Street Journal article cited above, one former employee owned hundreds of thousands of GE stock, which made up the bulk of his retirement portfolio outside of his pension. Had he diversified into other holdings, he would have participated in one of the best bull markets this country has ever seen.
A general rule of thumb for company stock? Keep your ownership levels under 10% of your overall investable net worth.
Now, that isn't feasible for everyone. However, remember that in most cases the point isn't to own as much as your company as you can, the point is to grow your net worth in a satisfactory manner taking on as little risk as possible to achieve those ends. Does diversification potentially temper return expectations? Yes, it certainly can. Does it correspondingly reduce risk? You bet! And that's a good thing for all the reasons cited above!
No Company Thrives Forever
Every company goes through a rough patch. For example, Microsoft's stock went nowhere for nearly a decade after the Tech Bubble. Worse, many companies go through more disastrous scenarios and never recover. However, we as investors tend to be overoptimistic about the long-term prospects of the holdings we like. This may be caused by overconfidence or simply recency bias, but the lesson is the same:
Is your company hitting on all cylinders? Great! Now might be a good time to take advantage of those gains and diversify your overall net worth. Is your company struggling? Even more reason to diversify your investment holdings
Additionally, even if your company continues to thrive, that doesn't mean the economy will also. Over 100 years of market history have made one thing certain - there are bull markets and there are bear markets, and what has gone up will eventually come down.
During the financial crisis, companies were quick to shed payroll when the opportunity presented itself. Why? Because not doing so meant bankruptcy or severe financial hardship. We all want to be team players, but it is okay to be just as pragmatic with your company stock. Increasing your personal financial well-being can only help in the long-run.
No, You do not Need to Hold Company Stock Forever
This has been alluded to again and, but no, you do not need to hold your company's stock forever. Just like you wil inevitalbly change jobs and/or retire, so too will your stock holdings need change. When you own your company's stock, you are doubling up the risk in your personal portfolio. So often we do not consider our own earnings power as part of our financial portfolio, but indeed it is. As we often say at Trailhead, savings rates matter more than rates of return.
As a hypothetical, let's say your company falls on hard times. Now, not only has your earnings power been put into question, at least over the near future, but your investment portfolio has dropped in value as well! We like win/win situations. Not lose/lose.
When you own the stock of a company that you either work for or receive pension benefits from, you have essentially doubled your risk. Should the company fortunes deteriorate, not only is your income at risk, but so is your portfolio.
Your company stock can be a tremendous way to build your wealth, via either restricted stock units, ISOs, or employee share purchase plans. However, it is best to see these plans as advantageous options for increasing your overall net worth and financial well-being not as the sole harbinger of your financial future. Though certain executives and founders may hold themselves to a different standard (and that's fine!), most employees should abide well the fate of GE and countless other companies. Be pragmatic and be savvy. And remember: Diversify, diversify, diversify.