Why GE’s Decline Signals Need For More Diversification in Portfolios
Once revered for being a long-time blue chip stock, GE lost its storied place in the Dow Jones Industrial Average in June after decades of costly acquisitions and accounting irregularities, caused the behemoth to shed over $100 billion in market value. The 126-year old company once represented all the modern technologies that people have come to rely on daily – light bulbs, x-rays, jet engines and industrial plastics. After being part of the Dow since 1907, the company’s failed attempts to innovate as America’s economy shifted from manufacturing to technology, finance and healthcare contributed to its removal.
During its heyday, MBA students spent 10 percent to 20 percent of their coursework studying the success of GE and its business strategy of acquiring its divisional heads for the conglomerate’s two dozen or more business units from competitors such as Home Depot or 3M. Before GE was ousted from the Dow, its shares had slid by a whopping 55 percent and closed as low as $12.95 in mid June.
The downfall of GE signals a monumental shift in the global economy as many traditional companies such as ones in the industrial and manufacturing sectors are being blown up and the conventional ways of investing for retirement are being regarded with more skepticism. GE’s fall from grace is a warning sign to investors that many of the standard rules taught to portfolio managers, RIAs and investing aficionados no longer apply.
Investors who are blindly accumulating retirement funds in an index mutual fund or ETF are starting to realize it is no longer a solution and many people will come up short on money once they retire. Another alarming trend for retirees is that more and more companies are reneging out of their pension funds. Avery Dennison, a packaging and labeling company, said in July it would no longer fund its pension plan. Eight years ago, the company halted its pension program, another path that many ailing companies are taking to cut costs.
Pension funds are becoming a thing of the past as most companies are opting for 401(k) plans, otherwise known in the financial advisory industry as defined contributions plans where the responsibility lies on the employee to save a percentage of their salary.
As the investment world is shifting, individuals need to adopt more current methods of allocating their hard-earned money. The traditional strategies of determining asset allocation by subtracting a person’s age from 100 and placing that percentage in equities and the remainder in bonds are proving to be inadequate as lifespans are increasing.
These methods are no longer a good way to save for retirement as volatility has increased in the markets. Believing that an income stream of 4 percent to 5 percent or around $50,000 annually derived from the mutual and bond funds from your retirement accounts is sufficient is also becoming a falsehood as more people are living into their 80s and healthcare costs rise. Those metrics were used by the insurance industry to sell annuities.
While these strategies worked for many decades because employees had pensions to supplement their retirement income, much of the growth generated in their stock accounts were due to the above average economic periods during 1982 to 2000 and 2008 to the present because of the long bull markets.
Those rules are no longer going to be relevant for younger generations saving for retirement. The ability to invest outside of traditional stocks, bonds, and mutual or index funds is proving to be the right strategy to deploy. In my past Forbes Finance Council article, I advocated for a 10-30% allocation to alternatives such as real estate, equity crowdfunding, or even cryptocurrency to withstand market volatility in times where former stalwarts such as GE are getting kicked out of the DOW Jones Industrial Average.
Rocket Dollar, an Austin, Texas-based retirement company, offers both Self-Directed IRAs and Self-Directed Solo 401(k)s. The ability to invest retirement dollars into more diverse assets classes such as startups, real estate and bitcoin and do not want to be limited by the offerings that brokerage firms have traditionally sold. Our future retirement security may depend on it.