Why Wall Street Workers Are Worse Investors Than Main Street

Main street investors
Main street investors

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.

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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.

%Gallery-159044%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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