How About Now?

Matt Bertuzzi sent me a link to this Reddit discussion last night.

My dad has $1.8 million dollars worth of GE. What should he do?

This is roughly 90% of his stock portfolio. I warned him to diversify a few years back, but he’s held the stock for years and is quite stubborn :). He is 67 years old and is retiring from GE within the next year or so.

He will then receive pension.

My first thought was, oh man that sucks. And then I was told to look at the date. This thread was eight months old. Ouch.

General Electric is struggling today just like it was when this question was asked in September 2017. The stock had declined 19% over the previous twelve months, and during that same time, other industrials like Boeing, Caterpillar, and Honeywell had gained 85%, 45% and 19%, respectively.

It was a tough time for shareholders, but it would have been reasonable to think that the worst was behind it, which is what many people on the thread were saying.  The first reply (of 124) said:

Leave him be…makes the most sense to me. With $1.8m with a close to 4% yield he is getting an additional $72,000 on top of the pension he will be receiving. I do not believe GE is going out of business and he has already ridden it down to near all time lows and we have a new leader taking over for Immelt who presided over this demise.

And the next response:

While not optimal, the dividend is okay, it should more then pay the bills. It is is a steady Eddy blue chip that will be around for tomorrow , there is more money to be made but; why bother the old dude, who even has a pension coming? Just be happy that you are still(maybe) in the will!

Yes the stock was a blue chip, and yes it is still around, except its only worth 56% of what it was when this question was first asked.

And to add insult to injury, two months after this post, GE announced they were cutting their dividend in half.

The $1.8 million balance in September 2017 is now worth just over $1 million, and what once yielded $72,000 now yields less than $35,000.

There are a few obvious lessons in here.

  • Stocks are not bonds. Dividends are not guaranteed.
  • Don’t have 90% of your net worth in a single stock, especially when you’re approaching retirement. This sounds obvious, but unfortunately it’s not uncommon. Working for a company gives you an illusion of control. As if this gives you more insight into the future of the stock.
  • If you need professional advice, go to an advisor, not the internet (yes, I’m biased).

There aren’t any updates on this thread; The most recent response is two months old and says three words: HOW ABOUT NOW?

Now, after a 44% decline, I would stress to this person that all is not lost, and it’s not too late to develop a plan. A financial plan is probably appropriate, but a game plan for getting out of this stock is a must.  And the plan must be committed to writing, otherwise it’s not a plan, but merely an idea.

Here’s an example of what someone can do in this situation: Sell 12.5% over the next eight quarters at a pre-determined date or price. The second Friday of every third month, for example. They can also sell 5% every 15% move. Here’s what I mean: The stock is currently at $14.20, if the stock drops to $12.07 or rises to $16.33, sell 5%. And if this triggers, then sell the remaining 7.5% on the pre-determined date, or if an additional 15% move occurs. If a 15% move does not occur in the three-month period, then sell the 12.5% and reset the clock.

I’m not suggesting this is the perfect plan, I wouldn’t be opposed to a more aggressive timeline, but at this point he’s probably loathe to sell anything, so just getting started would be a win.

Watching your retirement savings get cut in half is painful at any age and at any dollar amount, but there is no need to compound the problem with praying for a comeback. A plan of action is the only reasonable thing to do if you find yourself in this situation.