Diversification is the basic principle of portfolio management, and most of all of retirement planning. You’re trying to limit your risk; anything else is betting the rent money.
Owning stock in the company you work for is the opposite of diversification. It means that if you lose your paycheck you will also take a hit on the stock at the same time. Companies encourage employees to own stock in the hopes that ownership will improve loyalty; that makes sense for the company, but it’s rotten investment management. The guys at the top of Bear Stearns could mostly afford it, but ordinary folks really need to have their investments in other people’s employers.
The investment principle for retirees is the same. If the pension plan goes belly-up, the last thing you want is to take another loss in your private portfolio. For retirees, even the morale argument goes away, and of course they need to be especially risk averse since they can’t make up for investment losses by increasing their labor income. Pension funds should never be invested in the employer’s stock, and of course pensioners shouldn’t put their own money into it either.
For all I know, GM at the $27-$29 IPO price may be a bargain. But GM retirees shouldn’t own it. If the offering is so under-priced that it’s going to jump the first day, I guess I don’t see a problem in giving retirees a chance to profit from a quick trade, by allowing them to buy at the offering price, though of course the better solution would be to price the offering higher. But someone should tell them that they should buy the stock, if they buy it, only for quick flip. They shouldn’t hold it.
But the NYT story suggests that some GM retirees are planning to buy and hold GM stock. And the reporters, busy writing about how some of them got badly burned in the bankruptcy, pass up the opportunity to explain the basics of retirement financial management. Is it possible that they actually don’t know about diversification?