Do you own shares of stock in the company you work for? Do they
make up your entire 401(k) or just some of your "play money"? I'm
amazed at the amount of clients and prospects I meet with that have
a
significant
portion of their portfolio invested in their company's stock.
Familiarity and 'insider knowledge' seem to be the top reasons the
hold the positions. They quickly forget stock picking is nearly
impossible and even those with the greatest level of knowledge get
it wrong.
Familiarity bias is investing in what you know, or a business
that is visible to you. Investing in the grocery chain down the
street always seems better than the West Coast chain you've never
heard of. This decision is often made without doing any analysis or
evaluation of the fundamentals. What can be more familiar than the
place I spend 40 hours each week at? Ask the employees of Lehman
Brothers or American Airlines and I doubt any of them expected
things to go so wrong so quickly. When things go wrong, your job
may be in jeopardy as well as your investment.
"We are busy." Whether the assembly lines are working overtime
or the planes are full, these may not tell the entire story. The
day-to-day visual appearance of a company is unlikely to be the
best indicator of future stock prices. Profit margins, interest
payments, and fraud are all difficult to see, yet drastically
impact a stock price. Business may be picking up, but that does not
mean higher stock prices in the future. It is hard to detect what
future outside events might play a part in the value of your
company.
Finally, you would think upper management with a perfect view of
the company would get these decisions right. A recent
study
of share repurchase programs in S&P 500 companies by Mckinsey
& Company found, "Only 31 percent of the companies earned a
positive return from buying back shares-less than you would expect
from a random throw of the dice ." Their suggested solution,
"companies should
give up trying to time the market
." A simple dollar cost averaging approach outperformed the
companies' strategies by a median return of between 3 - 4.5%. This
is a great example of why dollar cost averaging is a crucial piece
to the
Snider Investment Method
.
Before making any investment, investors should evaluate what is
influencing their decision. Is it fear or greed? What behavioral
aspects are affecting my decisions: overconfidence, familiarity, or
others? Investors need to
put together a plan and stick with it
. One that is build around sound investment principles and
theories, not market timing and familiarity.
The intent of this article is to help expand your financial
education. Although the information included may be relevant to
your particular situation, it is not meant to be personalized
advice. When it comes to investing, insurance and financial
planning, it is important to speak to a professional and get advice
that is tailored to your unique, individual situation. All
investments involve risk including possible loss of principal.
Investment objectives, risks and other information are contained in
the Snider Investment Method Owner's Manual; read and consider them
carefully before investing. More information can be found on our
website or by calling 1-888-6SNIDER. Past performance is not
indicative of future results.