The $140 billion drop in the value of General Electric Co.’s stock price during the past year gets the full human interest treatment in the Wall Street Journal. I don’t want to minimize the deep individual suffering of those who had their retirement savings tied up in GE’s stock, but it is as good a time as any to examine a host of human failings. My hope is to help others avoid a similar fate.

The Journal sums up the scope of the problem this way:

The stock value lost by GE in the past 12 months is twice the amount that vanished when Enron Corp. collapsed in 2001 — and more than the combined market capitalization erased by the bankruptcies of Lehman Brothers and General Motors during the financial crisis. Longer term, GE’s market capitalization has fallen more than $460 billion since its 2000 peak.

This sort of thing has happened many times, as that paragraph indicates, and it will surely happen again. There are several forces that keep driving these errors. Recognizing and understanding them is crucial:

• Survivorship bias: There is a natural tendency to evaluate the world around us based on what we see and remember. That can lead to a somewhat distorted view of how stocks behave over the long run.

  One of my favorite examples of this is the case of the forgotten and then found stock certificate. It resurfaces every few years. A classic example is the man who in 2000 discovered he owned EMC shares purchased for about $16,000 year earlier that now were worth about $5 million; a more modern example is a forgotten and rediscovered purchase of Bitcoins.

  The purported lesson is that if you just buy a good stock or asset, and forget about it for a few decades, you can become rich. I suspect that is what the GE employees (and all too many others) were thinking when they overweighted their retirement accounts with company stock.

  But here is the problem with this concept: These stories are only newsworthy when they show great wealth creation. To those who discovered dusty old shares of Enron or Lehman Brothers in 2015, no one would write the article “Local man finds worthless paper in attic.”

  This is a classic example of survivorship bias, and it can skew investor expectations for future returns of individual investments.

• Failing to appreciate diversification: For a variety of reasons, people do not understand the value of having a broadly diversified portfolio. Perhaps they think it shows a lack of corporate loyalty to their employer; maybe it reflects a bit of a lottery-ticket mentality that perhaps your employer is the next Apple or Amazon or Alphabet (Google). Wishful thinking might suggest diversification is giving up a potential fortune.

  But every worker who gets company stock also gets a salary from that same employer. That is a very intense concentration of financial risk. For those workers, diversifying their company stock into broad indexes is the prudent approach. They won’t become Jeff Bezos, the world’s wealthiest person, but they will have happy, well-funded retirements. This is a rational and prudent trade-off (especially since almost none of us are going to become the next Jeff Bezos anyway).

• Risk and reward are closely related: The flip side of all high expected returns is increased risk of lower returns. To me, this is the single most important rule of investing. To get better than average returns you must be willing to accept higher -- sometimes much higher -- levels of risk. This means that sometimes, you will receive lower returns and even losses. This is how investing works.

  The inverse is that if you want safety you must accept the inevitability of lower returns. Failing to understand these simple principles is the biggest error almost all individual investors make.

• Failing to create a financial plan: All of this comes back to the basic question of why invest in the stock market in the first place. If your goal is to become rich, then (hopefully) you understand the odds, and sometimes the roll of the dice goes against you. But the more rational goal for most employees of big companies is to have more measured objectives: saving to buy a home, paying for the kids’ college, and most important of all, securing a comfortable retirement.

  If those GE employees had created a long-term financial plan, I believe it would have been obvious to most if not all that they were taking on more risk than was necessary to achieve those goals.

The fall in GE’s shares has caused many people a lot of pain. It could easily have been avoided.

To contact the author of this story:
Barry Ritholtz at This email address is being protected from spambots. You need JavaScript enabled to view it.

source: https://www.bloomberg.com/view/articles/2018-04-23/how-to-avoid-a-retirement-disaster

The Senate on Monday gave a preliminary OK to a $36.5 billion hurricane relief package that would provide Puerto Rico with a much-needed infusion of cash and keep the federal flood insurance program from running out of money to pay claims.

The 79-16 procedural vote set the stage for a final vote, most likely on Tuesday.

The measure also provides $18.7 billion to replenish the Federal Emergency Management Agency's rapidly dwindling emergency disaster accounts. On Monday, FEMA announced more than $500 million in aid to Puerto Rico, including $285 million to help restore power and water services to the devastated island. An additional $16 billion would permit the financially troubled federal flood insurance program to pay an influx of Harvey-related claims.

But the bill rejects requests from the powerful Texas and Florida congressional delegations for additional money to rebuild after hurricanes Harvey and Irma. Florida Democrat Bill Nelson, whose state's citrus industry endured significant losses during Irma, sought to add $3 billion in immediate agriculture assistance to the measure, but was denied by Majority Leader Mitch McConnell, R-Ky., who said money for crop losses would be in subsequent aid measures.

Senate passage on Tuesday would send the measure to President Donald Trump for his signature.

There was urgency to move the measure swiftly — rather than add more money to it at this time — because the government's disaster response and flood insurance reserves are running out. Democrat Sen. Patrick Leahy of Vermont said that would happen "in a matter of days" without action.

Still, members of the Texas and Florida delegations in Congress are unhappy because the measure failed to address extensive requests for additional hurricane rebuilding money. Texas, inundated by Harvey in August, requested $19 billion, while Florida sought $27 billion.

"I'm pretty disappointed with what the House sent over," Texas GOP Sen. John Cornyn said last week. But later, after speaking to both Trump and White House budget director Mick Mulvaney, Cornyn said he was promised that the White House would issue another disaster aid measure next month for Texas, Florida and Puerto Rico. A fourth, and perhaps final, measure is likely to anchor a year-end spending bill.

"The victims of these hurricanes can continue to count on our support," McConnell said.

Up to $5 billion of the measure's total could be used to assist Puerto Rico's central government and various municipalities that are suffering unsustainable cash shortfalls as Maria has choked off revenues and strained resources. An additional $150 million would help Puerto Rico with the 10 percent match required for FEMA disaster relief.

More than one-fourth of the island's residents don't have potable running water and only 17 percent have electricity, according to FEMA. Just 392 miles of Puerto Rico's 5,073 miles of roads are open. Conditions in the U.S. Virgin Islands are bad as well, with widespread power outages.

But Trump last week graded his response to the Puerto Rico disaster a 10 on a scale of 10.

"President Trump seems more concerned about claiming credit for a job well done than the actual situation on the ground deserves, particularly in Puerto Rico," Leahy said. "This is the hard part of governing," he added. "We dig in for the long haul, we stop patting ourselves on the back."

The measure currently before the Senate contains $577 million for wildfires in the West that forced agencies to tap other reserves for firefighting accounts and FEMA money.

Republicans delayed action last year on modest requests by President Barack Obama to combat the Zika virus and help Flint, Mich., repair its lead-tainted water system. But they are moving quickly to take care of this year's alarming series of disasters, quickly passing a $15.3 billion relief measure last month and signaling that another installment is coming next month.

Damage is still being assessed and final cost estimates for recovering and rebuilding from this year's hurricane season are not in yet. Some House conservatives are becoming restive at the high price tag for the disasters, which come as the deficit is growing.