Failure was not an option. The government finally stepped in on Sunday and unveiled plans to take over troubled mortgage giants Fannie Mae and Freddie Mac, putting to rest fears that the two firms would collapse and send the housing market into a death spiral.
The housing market breathed a sigh of relief – but no cheers from the stockholders of the two firms. Fannie Mae [FNM] was trading at around $7.00 towards the end of last week and immediately collapsed to about a buck on news of the announcement. As of close today it’s hovering around $0.74.
For investors Fannie and Freddie have seemed like a pretty safe play for years. Stodgy, even. A publically traded pseudo-government entity which was crucial to the U.S. economy and backed by government guarantees seemed like a pretty safe place to stash away some cash that you didn’t want invested in risky stuff; let the day-traders mess with the bio-techs and dot.coms.
But what a difference a week makes.
A lot of investors took a bath on this one. We’re still in the shadow of Enron, WorldCom, Quest, Tyco, and others – but I never cease to be amazed when I speak to folks who have large percentages of their net worth tied up in a single stock. Sometimes it’s because it’s a “safe bet”, or because they’re comfortable and haven’t bothered to rebalance. But most often it’s because they work for the company in question.
This isn’t smart behavior. Real estate investors understand that there is no reward without risk, but diversification is the way that smart, tactical investors hedge their bets. Anything else is just gambling.
Contrast this to the advice that millions of Americans swallow then they read what is undoubtedly the worst personal finance book ever: Robert Kiyosaki’s Rich Dad Poor Dad. Diversification, according to get-rich-guru Kiyosaki, is for suckers. “Put a lot of your eggs in a few baskets,” he exhorts. “Do not do what poor and middle class people do: put their few eggs in many baskets.” A balanced portfolio “…is not the way that successful investors play the game.” These are quotes from the book; I’m not making this stuff up. The biggest problem with Rich Dad Poor Dad is not that it’s filled with vague motivational psycho-babble; it’s that hidden in the self-help hucksterism there are gems like this that are actually dangerous.
Kiyosaki is undoubtedly a smart businessman and has made millions of dollars selling his books and courses, but I’d encourage his true believers out there to take a critical look at some of the ideas that he’s promoting.
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