For Joan, a former Lehman Brothers employee, it’s safe to say that the past 12 months were The Year from Hell.
Joan, who prefers not to use her last name, says her annual compensation has plummeted more than 30%, her biggest drop in pay in 18 years. Most of her savings was tied up in Lehman Brothers stock and options. She has a new position at another investment bank, but the fallout from Lehman’s meltdown last September continues to take a physical toll. Joan says she can’t sleep, and when she does finally nod off, she wakes up in the morning “with a knot of anxiety” in her stomach. An old shoulder injury is acting up, and she has gained 15 pounds. “I am under a lot of pressure to keep my job, plus trying to lay some foundation for another life, and I am feeling pretty worn out and distracted,” she says.
Trina Turner, 45, a book publicist in the Chicago suburbs, calls the past 12 months The Year I’d Like to Forget. Her small company has seen billings sliced in half. With the weight of more than $80,000 in credit-card debt, Trina and her husband, Dave, a graphic designer, are trying to unload their home in a short sale since they can no longer afford the ballooning mortgage payments. As is true of millions of other Americans, their home is worth less than they paid for it.
Few investors, if any, could have foreseen the scope of the market maelstrom that followed the Lehman bankruptcy. But with the benefit of hindsight, Joan, Trina, and an unfortunate cast of countless others wish they’d taken a harder look at their finances and a harder line on their spending so that the hit from the financial crisis wasn’t quite so brutal. While plenty of luminaries have weighed in on the impact of Lehman’s bankruptcy, here are a few key financial lessons these and other BusinessWeek readers have learned in the past year, often the hard way.
Lesson No. 1: Follow the 10% rule about owning company stock.
Joan, the fortysomething former Lehman employee, had all of her net worth tied up in Lehman Brothers stock and options. “After September 11, when we lost our main office, we worked off folding tables in a hotel, but the firm survived,” she says. “I never expected the firm that survived that would be taken down.”
While investors may question the value of diversification — many asset classes plummeted in concert during the downturn — loading up on the stock of the company you work for is very dangerous to your financial health. “Concentration in a stock, sector, or industry can be fatal to your portfolio,” says Frank Armstrong, a certified financial planner at Investor Solutions in Miami.
The biggest problem is that employees delude themselves into thinking they have the inside scoop. “Management always tells you how good things are to keep morale up until the very bitter end,” says Armstrong, 65, who experienced this firsthand when he was a pilot at now-defunct Eastern Airlines. “Employees really don’t have any more insight into the value of their company’s stock than outsiders do,” says Armstrong, author of The Retirement Challenge: Will You Sink or Swim? [FT Press]. Employees also make the classic behavioral finance mistake of mixing human capital, which is their ability to go to work every day, with financial capital, Armstrong notes.
It appears workers are getting that message. According to data from benefits consulting giant Hewitt Associates , the typical employee had 14% of his or her 401[k] account invested in company stock in August, down from 18% around the time Lehman collapsed. [Those statistics are based on outflows from company stock accounts as well as the movement of the market.] Even so, financial advisers say a 10% stake in your employer’s stock should be the maximum position in an overall portfolio.
Lesson No. 2: Don’t buy more house than you can afford.
Turner, the Chicago book publicist, regrets taking on an interest-only mortgage and buying more home than she could afford. The house the Turners paid $447,500 for in 2005 is now on the market for $309,000. “We were victims of our own optimism, combined with terrible timing and a terrible real estate and financial market,” Turner says. “It was the ‘perfect storm’ for ruining us financially.”
The Turners’ bailout will come from her parents, who have no debt, stellar credit, and enough cash to make a down payment on a new, cheaper house in another Chicago town. In hindsight, Turner wishes she wasn’t so blase about money and had set a spending plan. [See Lesson No. 3.]
Lesson No. 3: Grit your teeth and budget.
Budgeting can be extremely tedious but highly effective, says Marcia Tillotson of Wells Fargo Advisors, who runs a financial boot camp for clients with her partner Joy Kenefick in Charlotte. “The only way to figure out how much you can spend is to know how much money you actually have,” Tillotson says.
Job uncertainty helped Shane and Erin Tripcony keep their spending in check during the past year. Shane’s employer in Little Rock was acquired by another company last August. Erin, who is a part-time real estate agent, worried about her income as the national real estate market soured.
Shane, 39, and Erin, 38, obsessively track spending on an Excel spreadsheet and set a target budget at the start of each month. The couple, who have two kids, ages 5 and 7, cut back on discretionary spending, such as dining out and cable television. They overhauled their cell-phone plan to maximize minutes. “I’m a lot more cognizant of small purchases at Wal-Mart or Home Depot ,” says Shane, who manages online advertising campaigns for CardRatings.com.
Admittedly, the rules have loosened now that Shane’s job is going well. Erin recently sold a home, netting a $9,000 commission. But the couple still watches their spending. Says Shane: “You never know what’s around the corner.”
Lesson No. 4: Amass a cash stash.
The rule of thumb is that investors should have six months’ worth of cash on hand. But given the high rate of unemployment, Tom Henske, a certified financial planner in New York, recommends a cash cushion to cover 24 months of living expenses. “It takes at least 12 months to interview, negotiate, and secure the next job,” says Henske, a partner at wealth-management firm Lenox Advisors. “To avoid taking any job for the money — instead of the right job — a larger sum of cash is warranted.” And yield-crazy investors need to chill out, he adds. “The goal isn’t to try and squeeze out every inch of return from this pot of money.”
Joan, the former Lehman employee, regrets not having a bigger emergency fund to tide her over for the past year. “Liquidity, liquidity, liquidity” is her new motto, she says. She’s directing all of her savings into a money-market account.
To build up cash, Steve Youngs, 55, who works at a construction company in Charleston, S.C., decided to stop investing in his company’s 401[k] plan since the market soured. “Our cash is better in the bank,” says his wife, Liz, 51. In addition, the couple renegotiated their home and auto insurance policies, which will save $3,200 annually.
Lesson No. 5: Tune out the noise.
If anyone follows market headlines, it is Mark Van Patten, 61, general manager of the local paper in Bowling Green, Ky. Before the crash, Van Patten was an avid follower of investment gurus. He combed more than a dozen investment newsletters and Web sites — favorites included iBankCoin.com, Morningstar, Motley Fool, and Stock Scouter. He also set up e-mail alerts to track his favorite stocks, such as Google , Baidu , Allergan [“Botox, baby!”] and Corrections Corp. [“I love jails!”].
But after his retirement portfolio, which was heavily weighted in equities, plummeted by more than 40%, Van Patten stopped surveying all of these information sources because it was making him too stressed out. “I am now in a mode of ignore it all,” he says. “I believed in buy and hold. Now I believe nothing that comes from Wall Street or anybody who pretends to know anything about how markets act and react.” Of course, going into full-on ostrich mode isn’t necessarily the best strategy. Van Patten says he still does check his account statements every month, but he tries not to obsess over them.
One way to manage the chaos is to engage the help of a reputable, proven professional financial planner. Public opinion of advisers plummeted during the early days of the financial crisis, and investors remain wary. The crisis — as well as Bernie Madoff’s Ponzi scheme — “did an unbelievable job of destroying the trust of individual investors,” says Don Froude, president of Ameriprise’s Personal Advisors Group. Even so, investors who work with an adviser say they value their services more now than they did a year ago. According to the J.D. Power & Associates 2009 U.S. Full Service Investor Satisfaction Study released in July, financial advisers represent 30% of an investor’s overall financial satisfaction, up from 22% in 2008. Other factors include fees and performance. [J.D. Power, like BusinessWeek, is a unit of The McGraw-Hill Companies .]
Lesson No. 6: Keep it in perspective.
Naturally, BusinessWeek readers have regrets about the past year. Many of them say the biggest one is not having enough conviction to buy stocks when the market was at its nadir. “I wish I would have put more money into Citigroup when I bought it around $1,” says CardRatings.com’s Tripcony, who used a rollover IRA to buy financial stocks in the spring. Citigroup closed on Friday at 4.61.
As terrible as the past year has been for investors, though, Paul Steidler, an independent contractor in Reston, Va., says his 2007 divorce was a bigger financial smackdown. “Let’s get real. [Portfolio losses are] far less stressful than dealing with a bad marriage, being concerned about the health of a child, and aging parents—or one’s own health,” says Steidler, 47.
That’s why Stephen Koenigsberg, 62, a media relations consultant in Denver, heads for a hike in the mountains when he starts to worry about his retirement account and his business. “All the events that have transpired in this decade serve to reinforce that we only have today and that the tomorrow we imagine may never come,” Koenigsberg says. “In fact, it could be better.”