Let’s say you work at a fast-growing company whose stock has been blowing up over the past five years. It’s an exciting place to work, the job is satisfying, and management seems to have your back. Perhaps you have the the company’s current stock price as a widget on your desktop or phone lock screen.
Better yet, the company offers you free shares, or stock options, or the ability to buy its stock at a discount in your 401(k). What could go wrong?
Plenty. Everything. In a word: Enron. When Enron went bust in a massive accounting fraud in 2001, its employees lost their jobs, but many lost a lot more: the entire balance of their 401(k), which many employees had invested in 100% Enron stock.
Similar sad stories piled up during the 2008–09 bust. Are investors getting the idea? You’re already exposed to your company’s risks — you work there — and don’t need to pile on any more risk by investing in employer stock.
We analyzed data from investors who use the SigFig portfolio tracker, looking for employer stock inside users’ 401(k)s. Two companies stood out: Amazon (AMZN), and Costco (COST).
Before we look at the specifics, a few caveats. First of all, we looked only at stock inside the 401(k). Some companies (Google, for example) don’t offer company stock in their 401(k).
Second, even though we’re highly critical of loading up on employer stock, there may be a good reason to hold even a fairly large proportion of it. If the stock is offered free or at a discount (such as through an Employer Stock Purchase Plan, Restricted Stock Units, or an employer match), it may makes sense to buy some, then sell it off when you’re allowed to.
Finally, many investors hold investments outside their current employer’s 401(k). An investor who has $10,000 worth of WidgetCo stock in their 401(k) but a $400,000 diversified portfolio in a rollover IRA isn’t doing anything terribly wrong, but we’re only looking at 401(k) balances.
Now, the stuff you want to hear.
At Amazon, 71% of employees in the analysis hold between 10% and 20% of their 401(k) in Amazon stock. Another 10% of those employees hold between 20% and 30%, and 9% own more than 30%, including a small subset (0.5%) who have half of their 401(k)s or more in company stock. (See the breakdown here.)
Buying in bulk
The champion employer stock shoppers, however, are Costco employees.
According to Brightscope, a company that analyzes 401(k) plans, 33% of all the assets in the Costco 401(k) are invested in Costco stock. In SigFig’s data, about 20% of employees have more than 50% of their money in company stock. (See a more detailed breakdown here.)
We suspect this is for two reasons. First, Costco stock has done very well over the past five years. If you bought a little Costco stock a few years ago, it might have grown into a lot. (A good reason to rebalance regularly.) The same is true of Amazon stock, however, and Amazon employees own less company stock.
Second, Costco makes it easy to buy commission-free stock through its Employee Stock Purchase Plan. Chances are, other employers do, too. And it is up to employees to exercise caution, no pun intended, when bulking up on their own company’s stock.
Look, we love Costco: the discount retailer that helps us save our hard-earned cash when we buy our groceries, toiletries and even alcohol in bulk. But when it comes to investing, stuff happens — and diversification covers your assets when it does.
When it comes to investing, Baby Boomers seem to think that 60 is the new 40.
We recently discovered that only 7% of 51- to 60-year-old investors who track their portfolios with SigFig have allocated enough of their money in bonds to correspond to their risk appetite and investing horizon. And nearly 20% of investors in this age bracket who own target-date funds, have selected funds that are meant for younger investors: an indication that they might be seeking a more aggressive investing strategy that these funds offer.
And on top of that, some of these Boomers are adding even more risk.
Seven of the top 10 most popular securities among target-date fund owners ages 51 to 60 are stock funds. Those include: three growth funds, two value funds, an international stock fund, and an energy sector fund.
Another two of the top 10 picks are balanced funds that invest in a mix of about 60% stocks and 40% bonds. This asset mix is pretty close to where the typical target-date fund would be for this age group, but the balanced funds will stay put at 60-40 instead of continuing to dial down the risk over time.
Finally, about half of the investors in this group own a Fidelity Retirement Money Market Fund (FRTXX). That’s a low-risk choice — but an expensive one in its category. This fund’s expense ratio is 0.42, and, according to Morningstar, the average expense ratio in this category is 0.12. In fact, while SigFig users under 40 are overwhelmingly choosing very low-cost funds, older investors are often paying more than they need to.
It’s possible that investors in this age group are investing aggressively because they saw big losses during the 2008 financial crisis and recession, and they’re trying to make up for lost time. But adding more risk, well, just adds more risk–which does mean more potential upside, but also means risking more big losses.
On the other hand, one fool-proof way to end up with more money in retirement is to spend less of it now, particularly on investment fees. Over the long term, the money you save will make a significant difference in the size of your nest egg.
A couple of caveats about our research:
- We track data for investors who sync their portfolios with SigFig. They may not be representative of investors as a whole.
- For non-SigFig data, such as fund categories in the chart above: we believe the data presented was obtained from reliable third-party sources, but SigFig does not assume any responsibility for the accuracy of such information.
We hear a lot about the financial hard times and bad behavior of young people. They’re saddled with student loans, can’t get a job, and live in their parents’ basements.
Maybe so. But what about those under-35 Millennials who are able to save for retirement? How do they invest? Are they day-trading speculators, the investing equivalent of Fast & Furious street racers?
Nope. According to our data (based on accounts currently synced with SigFig.com) Millennial investors are better-behaved than their elders on a variety of measures.
Keeping it cheap and easy
Let’s start with one of our favorite subjects: fees. Fee-heavy investments silently take not-so-dainty bites off your nest egg over time.
Millennials tend to select lower-cost investments. Twenty-somethings pay an average of 0.39% in fund fees. (Which is still high, by the way – you could construct a well diversified low-cost portfolio paying just 0.15% in fund fees*.) Older investors pay up to 50% more: investors in their sixties pay 0.58%.
Older investors pay more, in part, because they own more bonds, and bond funds have, on average, higher expense ratios than stock funds. But since you can get a bond index fund for 0.10% or less, that can’t explain the whole difference.
Fewer trades, higher returns
Young investors also trade much less than older ones. The median user in her 20s makes 23 trades per year. Investors age 60–69 trade more than twice as often: 52 times per year.
Why does this matter? More trading is strongly associated with lower returns.
Picking good funds
A couple of weeks ago we looked at the most popular securities by age group. A “security” here can refer to an individual stock or bond, a mutual fund, or an ETF.
Among under-30 investors, the most popular security is Apple (AAPL) – a favorite among almost all age groups. The rest of the top five, however, are all low-cost index ETFs: a total US stock market fund, two international funds, and a bond fund.
There is only one fund in the top five securities held by investors in their 40s. For investors in their 50s, there are none.
What if we look only at the most popular funds and ignore individual stocks? A similar story: older investors are more likely to own expensive, actively managed funds. Over time, those costs add up.
The smart kids
Like we said up top, only young people who actually have an investment portfolio are going to sync it with SigFig. So we may be seeing more of the honor students.
But the same reasoning applies to every other age group. Young people really do appear to be better investors.
Now, if we could just get them to move out of our basements.
A target-date fund may be the ultimate set-it-and-forget-it option for retirement savers. The idea is, you choose a fund whose “target” retirement age (or date) matches yours. The fund handles your asset allocation for you, gradually getting more conservative as you approach that age. Couldn’t be easier.
But it appears that not all investors use them the way they’re designed.
In the past few years, more and more of Americans’ retirement savings have been pouring into target-date funds. In 2006, only 19% of 401(k) participants had a target-date fund in their portfolio. That year, Congress passed the Pension Protection Act, which made it possible for employers to automatically enroll their workers in a 401(k) and made target-date funds an acceptable default option. By year-end 2012, 41% of 401(k) participants had the funds in their portfolio.
We were curious to see how investors who track their portfolios on SigFig use these funds. Perhaps not surprisingly, the younger you are, the more likely you are to be invested in a target-date fund: 18% of investors between 31 and 40 years old own at least one target date fund from Vanguard, Fidelity or T.Rowe Price (the three firms that dominate the market), compared with only 8% of 51-60-year olds.
As you can see in the chart above, most users – anywhere from 74% to 79% own funds whose target retirement dates hit right around when they turn 65.
But many investors are doing something a little different with these funds. For example, 17% of people 31 to 40 who own a target-date fund own one with a retirement date of 2035 or earlier. They’re either expecting to retire as early as their 50s — or they want a more conservative asset allocation than the typical target-date fund would give them at their age.
Older SigFig users are more likely to veer off the target-date script than younger users. Among users 41 to 50, 14% are looking for a more conservative allocation or, who knows – maybe even planning to retire early. Meanwhile, 13% of investors in this age group are doing the opposite. And 19% of users 51 to 60 have bought funds that are “younger” than they are — either looking to take on more risk than funds aimed at people their age would allow or planning to delay retirement.
A couple of notes about this research:
- This data is derived from investors who track their portfolios with SigFig and have provided us with their age. It’s possible that these users invest differently than the average investor — or even differently than our user base as a whole.
- Age is self-reported It’s possible that some users may have provided us with inaccurate information.
Let’s say you have a dozen eggs and a variety of baskets…
Okay, you see where we’re going with this. Diversification can, to mix farmyard metaphors, save your bacon. Investors who put a big chunk of their money into a single stock exhibit a fragrant mix of hubris and amnesia. Stocks of individual companies—even big, seemingly unsinkable ones—can and do go to zero. Goodbye, Enron! Sayonara, Washington Mutual!
The US stock market as a whole is far more resilient: despite plenty of terrifying plunges, it hasn’t gone out of business once in centuries.
Plenty of investors, however, aren’t getting the message. The average SigFig user holds 15% of their portfolio in a single stock. One in four users holds more than 23% of their portfolio in a single stock. That’s a big pile of unnecessary risk.
These investors may have a semi-good reason to hold a big chunk of stock—namely, that they work for the company whose stock they’re holding, are participating in an employee stock discount program, and are not allowed to sell the stock yet.
That’s not a great reason, since employer stock is the most dangerous stock you can own: your salary is already tied to your employer’s fortunes; why throw your savings into the mix, too? Yet, as long as you’re unloading the employer stock as quickly as you reasonably can, it makes sense to participate.
But what about the 15% of users who have more than 50% of their portfolio in just two stocks? Perhaps these investors have gotten lucky, picking hot stocks that have now elbowed aside less exciting parts of the portfolio. Or they’ve worked at both companies whose stock they own and haven’t rebalanced yet.
One caveat to all this: we can’t be sure that these users are syncing their entire portfolios with SigFig. Perhaps we can only see the jagged tip of a more diversified iceberg.
But any portfolio with a giant investment in one or two stocks could be improved by trading in some or all of them for a diversified index fund or ETF — or another boring investment less likely to blow a hole in your savings.
Investors can afford to be aggressive when they are younger, but that aggressive manner should be mellowing with age. As you get older and your paychecks stop coming, you need to rely less on stocks and more on sources of fixed income — bonds, pensions, CDs — to pay your bills during retirement.
Does that mellowing really happen, though?
SigFig analyzed the asset allocation of more than 30,000 investors across all age groups and compared that to their ideal allocation, based on their risk profile and investment horizon. The result: across all age groups, investor portfolios were too heavy on equities and too light on fixed income investments.
We found that 93% of investors aged 50 to 60 had too much of their portfolios invested in equities; more than investors half their age — the 20- to 40 year-olds — with 90%.
Across all age groups, investors’ portfolios are simply lacking in bonds.
And as they get older, a greater proportion of investors have far less of them than they should. A 2014 study by the Investment Company Institute, a mutual fund industry group, found that a third of investors in their 50s had 100% of their IRA accounts in stocks, and so did a quarter of those age 60 to 64.
Why the love of stocks?
- Blame it on the Great Recession. Investors, especially those Boomer-age and up, are still feeling the effects of the market crash in 2008-2009. According to the Federal Reserve, Americans saw $1.3 trillion of wealth vaporize in the first quarter of 2009 alone. Older investors saw their retirement portfolios shrink so much, they’re still heavily invested in equities to make up their losses.
- Bonds are complicated. Stocks are easier to understand and to follow online. Bonds, with their multiple maturity rates, yields, prices and other factors to follow, can be head-scratchers. Most Main Street investors lack a deep knowledge of bonds.
Three Re-Investing Strategies for Retirement
- Readjust your stocks. If you are over 50, your retirement nest egg probably shouldn’t be invested in 100% of any one thing. That doesn’t mean you should give up on stocks. Jane Bryant Quinn, a personal finance expert at AARP, says Boomers should stick with at least 50% in stocks because fixed-income investments alone won’t be enough to carry you through in what could be 30 or more retirement years.
- Get a fix on your fixed income. Take a look at all the guaranteed sources of money you can get, including Social Security, a pension, lifetime-payout annuities, inflation-adjusted bonds, short-term bond funds and certificates of deposit. All your essential expenses during retirement should be covered by these investments. Consider it your “safe” money.
- Rethink your expenses. If the “safe money” won’t produce enough income to cover your basic expenses, rethink and reduce those expenses. You can’t afford to gamble on stocks to cover them.