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Amazon and an Imprudent Proposal

Two weeks ago, my client Carl (not his real name) asked me to put all of his $330,000 IRA retirement savings in Amazon. I couldn’t believe what I was hearing. I could not, in good conscience, implement this request. It is extremely imprudent to put all of our savings in a handful of stocks, let alone one stock. But Carl was adamant.

 

The Protagonist

Carl is retired, after working his entire life in the public sector. I’ve known him for several years. He’s smart and strategic. That’s why it was even harder for me to hear his request.

I told him it was extremely risky, akin to gambling. He said, let’s do it anyway.

My heart was pounding. I prayed for insight, a better way to make Carl understand that this is not in his best interest. I wondered if he was losing his mental faculties, but he explained to me that he understood the risk but he wanted to do it anyway.

 

The Root Cause

Upon further inquiry, I discovered that Carl was extremely worried that his savings would not last long. He wanted a way to make his money last longer. He read that Amazon was going to “take over the world,” that it would crush its competitors in any industry it chooses to enter. Carl decided he wanted to go “all in” on this tech company.

 

The Compromise

Given this new insight, I explained to Carl that we can make his portfolio more aggressive, without making imprudent bets. For example, we can increase his exposure to emerging market stock funds to increase the potential return of his portfolio (the red dot at the upper right of the graph below, labeled EM Equity).

Expected long-term returns of various asset class, from Research Affilates.

*Graph from Research Affiliates

Investing in a mutual fund or ETF reduces what’s called “systematic risk,” since the fund invests in hundreds or a few thousand stocks.

I heaved a euphoric sigh of relief when Carl agreed to my recommendations. For now.

 

What Could Have Been

If Carl placed all of his retirement savings in Amazon on March 19, he would have lost roughly $33,000 in a matter of two weeks, as Amazon’s stock price tanked following attacks from President Trump.

The price of Amazon stock from March 19 to April 4, 2018.

Take Away

My experience with Carl reminds me of the extreme importance of working with an expert. We are humans, and sometimes our emotions, fear, and anxiety take over. A third party professional who acts in our best interest can be there to guide us back toward the light.

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Alvin Carlos, CFA, CFP®

About Alvin Carlos, CFA, CFP®

Alvin Carlos, CFA, CFP® is passionate about helping middle class professionals make smarter financial decisions. He is the CEO of District Capital Management, a financial planning and investment management firm for the everyday people. Alvin is a CERTIFIED FINANCIAL PLANNER™ practitioner and has a Masters degree in International Relations from SAIS-Johns Hopkins. In his spare time, Alvin enjoys swing dancing and Ultimate Frisbee. He also volunteers for Catholic Charities’ new Financial Stability Network, which helps low-income folks with their finances.

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