The Financial Trap That Caught a Wall Street Legend

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Welcome to The Money Series, and if you are new here, thank you for signing up. Personal Finance can feel ambiguous and overwhelming, but I am here to help simplify the journey.

During the 2008 financial crisis, one of the most powerful men on Wall Street lost nearly everything. Richard S. Fuld Jr. was the longtime CEO of Lehman Brothers, a 158-year-old investment bank many thought was too established to fail. He spent decades rising through the ranks and was paid generously, mostly in company stock. At the peak, the value of his Lehman shares reportedly exceeded $900 million.

But when the financial crisis hit and investor confidence evaporated, Lehman’s stock price collapsed, dropping more than 90% in just a few months. By the time the firm filed for bankruptcy in September 2008, its stock was virtually worthless.

Fuld lost almost all his unsold shares. His salary stopped. His net worth cratered. In one brutal swoop, the same company that had built his career, income, and wealth wiped it all away. Fuld’s is a stark reminder that even the most seasoned professionals can suffer immense losses when concentration overrides diversification

Becoming a savvy investor is about building a portfolio that isn't overly reliant on any single asset, industry, or region. The goal is to ensure consistent returns and protect your portfolio from significant losses when some investments take a hit. A well-diversified portfolio isn’t reliant on any single company, sector, or geography. It’s about balance, resilience, and adaptability.

Typically, when people discuss investment diversification in the traditional sense, it usually refers to spreading risk across:

• Asset Classes: Don’t rely solely on stocks. Consider adding bonds, real estate, and even commodities like gold. Different assets thrive in different economic conditions. For example, interest rate cuts typically benefit bonds, while hikes make short-term fixed income investments more attractive. Even within asset classes, diversification matters. This is where broad-based index funds and ETFs come in.

• Sectors: Tech may be booming today, but it may not always be. Healthcare, consumer goods, and industrials all operate on different cycles. Even within stocks, avoid putting too much into one industry. A downturn in one sector might be offset by resilience or growth in another.

• Geographies: Developed markets offer stability, while emerging markets have long-term growth prospects. A mix of both gives balance, and some ETFs can help you access these markets. Global and international ETFs, as we've discussed before, are fantastic for gaining exposure to diverse economies, from Europe to Asia to Latin America.

• Time horizons: Blend short-term stability (like cash or short-term bonds) with long-term growth (like equities). With bonds, short-term bonds are less sensitive to interest rate changes, while longer-term bonds may offer higher yields but come with greater interest rate risk. Balance is key.

Now, let's talk about some less obvious, but equally crucial, aspects of diversification that often get overlooked.

• Diversifying Away from Your Employment Industry: If you work in tech, finance, or any specific industry, and your portfolio is also concentrated in that same sector, you’re doubling down on risk. If the industry faces a downturn, your job and investments could take a simultaneous hit. Even diversified ETFs such as the NASDAQ-100 carry a heavy tilt toward the tech sector and offer less diversification for someone who works in tech.

• Diluting Vested Shares in Employer's Stock: Many companies, especially in tech and startups, offer stock options or Restricted Stock Units (RSUs) as part of the compensation. While it's great to have a stake in your company's success, it’s risky to let too much of your net worth ride on a single employer. Once your shares vest, consider gradually selling a portion and reinvesting into a diversified portfolio.

• Home Country Bias: This is especially crucial for people from developing countries. It's natural to invest where you're familiar, but putting all your money into your home country's assets can expose you to unique risks such as currency devaluation, inflation, and political risk. If you also earn and spend in that same country’s currency, you’re compounding your risk. Investing globally helps spread that exposure.

Your diversification strategy should also evolve with your age and goals. If you’re in your 20s with a long time horizon and a higher risk tolerance, you might lean more heavily into stocks, while still diversifying within equities. As you get older, you may want to tilt toward more income-generating or capital-preserving assets like bonds. Always remember that diversification is not a one-time decision. It’s an ongoing process that involves reviewing and rebalancing your portfolio as your life, goals, and the markets change.

Reflect on This:

• Are your investments too tied to your employer?

• Would a market shift hit your job and your portfolio at the same time?

• Is your financial future riding on one company, sector, or country?

Till next week, I am rooting for you, money-ly!

Dee

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Disclaimer: This does not constitute financial advice. Please conduct your research or consult your financial advisor for important financial advice.