Survey Reveals The Lessons of Enron May Still Be Unclear

While many Americans are changing the way they invest, they still appear to be in the dark when it comes to diversification

The collapse of Enron stock has made the vast majority of investors think twice about the way they invest. In fact, 72 percent admit they have changed their investment behavior as a direct result of Enron news, according to a new survey from Charles Schwab & Co., Inc. Even if they have changed their investment behavior, it hasn't caused them to diversify. The survey indicates that only 27 percent of the survey respondents say they now "diversify more." According to the Schwab survey, the top five ways investors have changed their behavior are:

• I avoid companies I don't understand (33 percent)
• I do more research (31 percent)
• I diversify more (27 percent)
• I pay more attention to financial advisors (22 percent)
• I worry more (15 percent)

"One of Enron's most painful lessons is the danger of over concentration in an individual stock -- just as the tech wreck of 2000 taught us we shouldn't be too heavily concentrated in particular industry sectors," said Carrie Schwab Pomerantz, vice president/consumer education of Charles Schwab & Co., Inc. and founder of Women Investing Now, an initiative designed to educate and inspire women investors. "Yet it seems investors may still not appreciate how diversification across and within asset classes can help protect a portfolio against worst-case scenarios."

Other Findings

• The Schwab survey revealed that, of the investors who know that their company's stock is an investing option for them in their 401k, 23 percent hold more than 20 percent of the stock in their own plan account. The 20 percent threshold is significant because it represents the beginning range of a concentrated stock position, which can significantly increase overall portfolio risk, according to the findings of the Schwab Center for Investment Research. Interestingly, a fifth of survey respondents (20 percent) indicated they either don't know how much company stock they own, or they're unsure if their plan even offers this option.
• A large majority of survey respondents (71 percent) believe they should review their 401k accounts at least every six months -- yet 61 percent actually do so. And, while only four percent say there's no need to ever review a 401k plan once it's been set up, 15 percent admit they have never reviewed their own.
• The Schwab survey also revealed that as many as one-third (34 percent) of respondents don't know which companies constitute the largest stock holdings of their mutual funds. Another third (35 percent) have only "a general idea," and just 21 percent are "very clear."
• The Schwab survey also revealed that 33 percent of investors are less confident now than they were a year ago in their ability to choose investments that will perform well over time.

Background

The survey was conducted by telephone February 7-11, 2002, interviewing 620 adults who reported they have a 401k plan at work (364 men and 256 women). The interviews were conducted through Caravan, a national telephone omnibus survey. The survey was developed for Charles Schwab & Co., Inc. by Leflein Associates, Inc. and fielded by Opinion Research Corporation International of Princeton, New Jersey. The margin of error for this survey is +/- four percentage points.

Rick Meigs, Publisher, 401khelpcenter.com