Why Wall Street Workers Are Worse Investors Than Main Street

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Wall Street's big banks paid out an astounding $156 billion last year in salaries, bonuses, and benefits.

Yet while investment bankers' checking accounts were growing, their retirement savings took a massive hit.

According to a recent Bloomberg article, at the five largest Wall Street banks, employees who held their own company stock in their 401(k) accounts experienced more than $2 billion in losses in 2011. Even worse, sometimes company stock was the biggest holding in those worker portfolios.

Point Fingers All You Want

Although reading this may make you chuckle with schadenfreude, there's a lesson here that may apply to you as well.

The huge amount of money these bankers lost happened because of poor diversification. In other words, these investment bankers had too great a share of their portfolios tied up in their employers' stock.

  • Last year, Morgan Stanley (MS) employees held a whopping 24% of their retirement assets in their company's stock.
  • JPMorgan (JPM) employees held slightly less: 18%.
  • At Bank of America (BAC), company stock represented 13% of assets held.
  • Citigroup (C) and Goldman Sachs (GS) employees were less invested in their employer, with company stock in 401(k) plans representing just 8% and 2% of assets, respectively.


While this trend is startling, it's not one unique to Wall Street.

In fact, according to Callan Associates, Americans who have the option of buying employer stock in their 401(k) plan have an average of 13.4% of their retirement assets in their company's stock.

Have We All Forgotten Enron?

The decision of whether to invest in your own company's stock is difficult because you'd like for your daily work to impact the growth of your savings. You're familiar with your employer, which also breeds confidence.

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But when your income is tied to a company and your investments are also entwined, one bad quarter or year and both your job and savings could be gone.

Which is what happened to Enron employees following the company's 2001 collapse -- and Jim Carrey's character Dick Harper in the 2005 movie Fun With Dick and Jane after his company, Globodyne, suffered a similar fate.


How to Be Smarter Than Wall Street Employees

There's nothing wrong with owning your company's stock. But it should account for only a small fraction of your assets.

A safe rule of thumb is for it to comprise no more than 5% of your overall portfolio.

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Why Wall Street Workers Are Worse Investors Than Main Street

BOK (BOKF) is the smallest bank on the list with a $3.8 billion market value and $26 billion in assets. The bank holding company is based in Tulsa, Okla., but its branches operated under several names in other states: Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas and Colorado State Bank and Trust. BOK is worth about 12.5 times earnings and is valued at 1.3 times book value. The return on equity is 11%, and it offers a 2.7% dividend yield to the common holders. Shares are trading around $56.00, and Wall Street analysts have a target above $59.00.

By 24/7 Wall St.

Photo: Les Stockton, Flickr.com

KeyCorp (KEY) is the one exception in our list to our rule about share prices under $10. Its other metrics more than make up for this. It has a market cap of just $7.12 billion against some $87 billion in assets. It operates in 14 states throughout the Rocky Mountain, Northwest, the Great Lakes and Northeast regions. To make its appearance on this list even more impressive, KeyCorp is headquartered is in Cleveland, where a large number of now-troubled loans were issued. The bank has a return on equity of 9.2% and pays out a 2.7% dividend yield. Shares trade around $7.50 but have a target price of $9 from Wall Street.

By 24/7 Wall St.

PNC (PNC) is based in Pittsburgh and has almost $300 billion in assets, with over 2,500 branches and almost 7,000 ATMs in 14 states. It has a market cap of $31.01 billion, and its stock is valued at 10.6 times earnings and at less than 0.9 times book value. The return on equity is 8.9%, and the company pays out a 2.73% dividend. Shares are trading at under $59, but Wall Street is eyeing a price of $70.50. PNC was even strong enough financially to close its National City acquisition at the end of 2008 when there was so much fear in the financial markets. PNC also owns almost a quarter of the great asset-management firm BlackRock (BLK).

By 24/7 Wall St.

M&T Bank Corporation (MTB) is based in Buffalo, N.Y., and now has more than $79 billion in assets. Excluding any small purchases made recently, M&T had nearly 700 branches, 2,000 ATMs and a presence in eight states. The market cap is $10.12 billion, its P/E ratio is 12.7, and its price-to-book value ratio is only 1.07. M&T has a return on equity of 9.5% and pays out a dividend of 3.5% to common stockholders. The stock is trading just north of $80 a share, but analysts have set a target price of about $90. Berkshire Hathaway owns almost 5.4 million M&T Bank common shares worth more than $400 million.

By 24/7 Wall St.

Photo: Afagen, Flickr

U.S. Bancorp (USB) is often overlooked as a money-center bank because it is a super-regional located in Minneapolis. But it's the fifth-largest commercial bank in the United States and caters to millions of consumers. With $341 billion in assets, more than 3,000 branch locations and more than 5,000 ATMs, its operations are spread out over 25 states in America. Berkshire Hathaway owns some 69 million shares worth more than $2.1 billion. The bank's market cap is $59 billion. It is worth about 10 times earnings and 1.6 times book value. The return on equity is very high at 16%, and it offers a 2.5% dividend yield to the common holders. Shares are trading around $31.50, and Wall Street analysts have a target of about $34.25 on this great, safe bank.

By 24/7 Wall St.

Despite the media attention surrounding the JPMorgan's (JPM) multibillion-dollar trading loss, the firm is still in good shape compared to many of its peers. It has a fortress-like balance sheet with about $2.3 trillion in assets, and CEO Jamie Dimon has said the only thing that could lead to the bank's failure is a collision of the Earth and Moon. Despite a share price decline following news of the "London Whale" trading loss, the company still has a sizable market cap of $135.17 billion. Shares trade at less than 8 times earnings and only about 0.7 times book value. The return on equity is 9.8%, and the company pays a dividend yield of 3.4% on the common stock. While the bank shares are trading at just over $36, analysts value the company at $47 a share.

By 24/7 Wall St.

Wells Fargo (WFC) is the undisputed safest bank in America now that JPMorgan Chase & Co. (JPM) has come under scrutiny -- even if Chase has about $1 trillion more in assets. With some 6,200 storefront branches, more than 12,000 ATMs and an asset base of over $1.3 trillion, it has a presence in almost every state. Warren Buffett's Berkshire Hathaway owns close to $13 billion worth of the common stock, and his stake keeps rising. The market cap is a whopping $171 billion. The shares trade at less than 9 times earnings and at almost 1.2 times book value. The return on equity is just above 12%, and it offers a 2.7% dividend yield to the common holders. While shares trade at around $32.50, Wall Street analysts value the bank at almost $38 per share.

By 24/7 Wall St.

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If your company gives you no choice but to receive a 401(k) match in the form of the company's stock (which is the case at Morgan Stanley -- explaining why their number is so high), you should immediately sell those shares and invest the proceeds in a more diverse portfolio.

That means a mix of large-cap and small-cap, domestic and foreign, growth and value stocks, which will help you ensure a comfortable retirement, and not leave your long-term financial security tied too closely to the health of the company that's responsible for your paycheck.

This article was written by Motley Fool analyst Adam J. Wiederman, who owns no shares of the companies mentioned above. Click here to read Adam's free report on the best ways to plan for a wealthy retirement. The Motley Fool owns shares of Citigroup, JPMorgan Chase, and Bank of America. Motley Fool newsletter services have recommended buying shares of Goldman Sachs.

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