Comments on: Dear Irrational (from a finance professor)

By: Marc R

Marc R — Wed, 22 Oct 2008 21:33:12 +0000

I’m all for diversification, but just to play devil’s advocate…doesn’t diversification defeat the purpose of giving an employee stock options from an employer’s perspective? Yes, they are a financial bonus, but the underlying purpose is to tie the employee’s compensation directly to the stock price and give the employee a reason to enhance shareholder value. An employer could create a graduated vesting schedule to achieve the intended purpose, but aren’t there tax consequences to doing so? I’m not sure if there are safe harbor provisions regarding stock options.

By: Susan R.

Susan R. — Sun, 12 Oct 2008 04:06:06 +0000

People are basically lazy. Why did the student in question not diversify? Probably because the acquisition of the stock(s) was passive. So, is this a case of get something for nothing, or a case of getting nothing for your something?

By: SOC

SOC — Thu, 09 Oct 2008 12:55:41 +0000

I worked for a large UK company that offered an attractive looking share save scheme and bonuses with a choice of cash or shares. I had an economics lecturer who also preached diversification. He told us a story of his own experience with share schemes in a company that went under. Basically resulted in him becoming a lecturer. He used to say “Diversify or you could end up teaching you, like me!”. I think that helped me remember it anyway!

I chose not to take part in the scheme and took the cash instead of the shares.

Collegues advised me to take all share options that I could, since they had been with the company for many years and it had always worked out for them.

Oh, and the company I used to work for. Northern Rock plc.

If you are not familiar search for them in conjunction with the term ’2007 credit crisis’.

Also a comment on the gold investing. It is an investment like any other and thus incurs its own opportunities and threats. Sometimes it will work in your favour, sometimes it will not. Too much to go into here but do your research before sticking all your money into gold. Search the net for ‘investing in gold is bad” and read a few articles. Oh and also, one of my favourite quotes:

“It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” – Warren Buffet

For stability, stick with sensible informed diversity.

By: irrational professor

irrational professor — Tue, 07 Oct 2008 19:15:30 +0000

Dan, you might try thinking in terms of bounded rationality. Most theories of rationality ignore the costs of cognition and the fact that with each additional stock added to a portfolio, the costs in terms of mental processing increases. There is likely a point (a relatively low point) when the number of different stocks becomes more costly than the perceived benefit, so that they are acting rationally within the bounds set by cognitive costs.

By: Noonan

Noonan — Tue, 07 Oct 2008 14:44:40 +0000

Diversification may not be the complete answer to today’s markets, but it helps you avoid situations the employees of Lehman and Bear Stearns found themselves in. If they had diversified their own holdings away from their company, they would have come out less bruised than they are now.

It should be obvious that, unless you control the direction of the company, you should not be heavily invested in that company. After all, if the company hits a rough patch, you lose not only on your investment, but also potentially your job and income. That’s a double whammy you should avoid at all costs.

By: Christian Debt Solutions

Christian Debt Solutions — Mon, 06 Oct 2008 22:09:05 +0000

Professor Dan, I do not think diversification is the answer in today’s market. I have been promoting gold in small amounts as a key to financial security. I guess I was right.
Your trusted CFP.