Savvy people make dumb diversification mistakes.
In previous posts I have discussed the problems that ordinary employees have with investing their retirement plan assets. In short, they fail to diversify. They mostly put too much money in the stock of their employer. In 2008 we saw two spectacular events (Bear Stearns and Madoff) that illustrated that even the financially savvy, rich and famous fail to diversify too.
In the spring, we learned that the employees of the failed investment bank Bear Stearns where heavily invested in the firm's stock. The 14,000 employees lost a total of about $5 billion (an average of $350,000 each). These are financial professionals at one of the worlds more prestigious financial institutions. They should know better than to have so much money tied up in one stock.
In the Madoff $50 billion Ponzi scheme case, many professionals and rich people lost most, if not all their wealth. Many charitable foundations that managed tens of millions (even billions) of dollars lost so much they had to close operations. For example, the Picowar Foundation lost $1 billion and closed its doors. The Frank Lautenberg Foundation lost $12.8 million of its $13.8 million in assets. The Carl and Ruth Shapiro Family Foundation had 45% of its $345 million portfolio with Madoff.
