A news item caught my eye recently. Yet again, employees are suing their own company (JP Morgan) for allowing them to buy company stock in their 401(k) plan while allegedly hiding known financial risks. This lawsuit is just plain silly, a by-product of the litigious nation we live in. Aside from the fact that their lawsuit has no merit (they really thought they should realize the upside benefit of equities investing with no downside risk???), there are several reasons why employees should simply NOT invest any of their 401(k) funds in their employer’s stock:
Continue Reading Why Investing in Your Own Company’s Stock is a Horrible Idea
The perfect example of what can happen is Enron. I recommend watching The Smartest Guys in the Room to see what happened to the employees.
The douchebags like Skilling and Lay were selling their stock because they knew Enron was toast. They had convinced thousands of their employees to buy the Enron stock in their 401ks and then they locked them up by not allowing them to sell as the company went down the tubes.
Employees who had been there for 30 years lost their entire life savings and their jobs.
401(k) plans do not allow participants to sell short or buy bear trend funds. 401(k)s have been designed to help pump up stock and bond prices over the years. In 2008, most 401(k) owners were left holding the bag as their accounts fell by more than half. This time could be much worse.
Right now, short term Treasury funds are the only things that make sense to me when I look at my 401(k) options.
Bob
My entire 403b account is in short term Treasuries.
I concur with watching Smartest Guys in the Room. Even though the story’s a few years old now, the film was really well-done and a lesson in how easily this can happen again (Sarbox didn’t do anything to deter this from actually happening again).
Nice to see that you practice what you preach, Admin!
There is debate as to what to expect from the Treasury market over the next few years. As long as deflation is the main threat, rates would stay low unless solvency comes into question. Later, if efforts to inflate make headway, rates would go up, and the solvency question may become even more pressing.
There are rumors that the Govt. may consider ‘nationalizing’ 401(k)s — we need to watch for signs of that — better to pay a penalty than lose access to the funds.
And of course, if TPTB trigger hyperinflation as a last resort, then we want to be using the money to finish prepping, buy gold, silver, ammo, food, etc.
Managing money is a bitch, isn’t it?
My mom worked for Honeywell,a few months after enron people who worked there lost theyre 401k money.Some were getting ready to retire.Luckily i had asked my mom about her retirement and she had moved hers so she missed losing all her retirement money.
Admin, what will you do when the next round of easing comes in june or july? short term treasurys at that point will be losers in real terms, at least if the last rounds of QE were any measure (drives what we consume up, and heaven forbid it drives rates up in the expectation of some “growth” from the money printing).
dd
Short term treasuries won’t take a big hit. LT treasuries would lose.
Another QE would just be pushing on a string. It’s impact would be a month or two.
My CEF and TBF would go up, more than offsetting losses in my ST Treasuries.
i didn’t mean on the security, i don’t know your duration anyway (some refer to 5 years as short-term, that gets dinged up a bit), i’m saying it’s likely input costs (food, gasoline, detergent, etc.) rise. but maybe not.
and point taken on pushing on a string, short-term sugar high. agreed. i’m just thinking gold/silver over treasurys.
dd
My 403b basically offers the Vanguard family of funds. I’m in their ST Treasury fund with a duration less than 1 year. It’s about as safe as I can get. I don’t trust Money Market funds.
Here is another investment to avoid. Hell, this one might make Facebook look like the investment of the decade.
http://ca.news.yahoo.com/scientists-invent-cannabis-without-high-134435371.html
I_S
dd, if short term treasury rates rise, those who sell after the rise may or may notexperience a small loss, based on the timing of purchase and sale. Those who hold until a new set of short term bills are issued would be paid par at maturity and lose nothing. As Admin points out, the duration is brief. The rollover effect helps keep accounts whole.
Admin, I agree with your comment on money market funds. As late as a couple of months ago, there were stories that some of the large US money market funds had as much as half their assets in the short term paper of European banks, chasing yield.
Bob
I think Vanguard MM was one of those funds. I exited stage left.
thanks for bond math lesson, Bob. i feel much smarter now.
you missed my point entirely.
Ah! The smell of burning IRA’s and 401k’s puts such a terrible stink in the air. Like a napalm flare out over one of Admin’s rants.
Rule #42C. Never have an IRA or 401K that you cannot directly control the investments therein and absolutely never have a 401K that invests in the Company stock. Make that Rule #42C thru Z.
The reasons Admin and I are both loosing money on our T-Bond shorts are several. #1. Obama bin lyin’ has gotten himself convinced by Button Up Bennie that having the Fed buy all the 10 and 20+ year T-paper is a good idea. #2. With Europe about to stuff it’s head up it’s ass and swallow itself whole, every Italian, Greek, Portuguese, Paddy and Spaniard with 10 Euros to rub together still mistakenly believe that the US dollar is the safest place to put your money.
So every nervous European is buying T-paper or Germanic bunds to escape the coming depreciation of the new drachma, peso, what ever it may be. This assists the Fed in holding down intermediate to long rates.
When the European Union finally goes bust, Admin and I will probably loose even more as our shorts burn! Until currency controls are slapped in place to keep citizens from escaping the noose of national revaluation of their native currencies as the Euro folds.
But.. Sooner or later (and I’m very patient), Bennie and the Federals are going to play the wrong tune once too many times and loose control of intermediate and long rates. At that point, it won’t take two days to make back the losses and a week to quad your money. I especially like TBT when the shit hits the fan as it is a leveraged short and will like money printer at the right time.(not now). I thought TBF had hit bottom last January at 32. Ha! Luckily I buy stuff like that in tranches so I only loose money on the first tranche if things go the wrong way and dump the trade if it goes too far.. It’s almost there now after yesterday but for some reason I just can’t bring myself to trash the trade quite yet..
MA
My 401(k) allows self-management, and I have some reverse-index funds, CEF, etc. It’s actually a pretty decent plan, and I can buy/sell anything except ‘pink sheet’ type stock. That said, if I could take it all w/o a tax hit and buy some rental property where I live with the proceeds, I would.