Survival Stories and Lessons from the Crash

BusinessWeek readers share financial wisdom learned in the past year, including: Don't buy more house than you can afford

By Lauren Young

For Joan, a former Lehman Brothers employee, it's safe to say that the past 12 months were The Year from Hell.

Joan, who prefers not to use her last name, says her annual compensation has plummeted more than 30%, her biggest drop in pay in 18 years. Most of her savings was tied up in Lehman Brothers stock and options. She has a new position at another investment bank, but the fallout from Lehman's meltdown last September continues to take a physical toll. Joan says she can't sleep, and when she does finally nod off, she wakes up in the morning "with a knot of anxiety" in her stomach. An old shoulder injury is acting up, and she has gained 15 pounds. "I am under a lot of pressure to keep my job, plus trying to lay some foundation for another life, and I am feeling pretty worn out and distracted," she says.

Trina Turner, 45, a book publicist in the Chicago suburbs, calls the past 12 months The Year I'd Like to Forget. Her small company has seen billings sliced in half. With the weight of more than $80,000 in credit-card debt, Trina and her husband, Dave, a graphic designer, are trying to unload their home in a short sale since they can no longer afford the ballooning mortgage payments. As is true of millions of other Americans, their home is worth less than they paid for it.

Few investors, if any, could have foreseen the scope of the market maelstrom that followed the Lehman bankruptcy. But with the benefit of hindsight, Joan, Trina, and an unfortunate cast of countless others wish they'd taken a harder look at their finances and a harder line on their spending so that the hit from the financial crisis wasn't quite so brutal. While plenty of luminaries have weighed in on the impact of Lehman's bankruptcy, here are a few key financial lessons these and other BusinessWeek readers have learned in the past year, often the hard way.

Lesson No. 1: Follow the 10% rule about owning company stock.

Joan, the fortysomething former Lehman employee, had all of her net worth tied up in Lehman Brothers stock and options. "After September 11, when we lost our main office, we worked off folding tables in a hotel, but the firm survived," she says. "I never expected the firm that survived that would be taken down."

While investors may question the value of diversification—many asset classes plummeted in concert during the downturn—loading up on the stock of the company you work for is very dangerous to your financial health. "Concentration in a stock, sector, or industry can be fatal to your portfolio," says Frank Armstrong, a certified financial planner at Investor Solutions in Miami.

The biggest problem is that employees delude themselves into thinking they have the inside scoop. "Management always tells you how good things are to keep morale up until the very bitter end," says Armstrong, 65, who experienced this firsthand when he was a pilot at now-defunct Eastern Airlines. "Employees really don't have any more insight into the value of their company's stock than outsiders do," says Armstrong, author of The Retirement Challenge: Will You Sink or Swim? (FT Press). Employees also make the classic behavioral finance mistake of mixing human capital, which is their ability to go to work every day, with financial capital, Armstrong notes.

It appears workers are getting that message. According to data from benefits consulting giant Hewitt Associates (HEW), the typical employee had 14% of his or her 401(k) account invested in company stock in August, down from 18% around the time Lehman collapsed. (Those statistics are based on outflows from company stock accounts as well as the movement of the market.) Even so, financial advisers say a 10% stake in your employer's stock should be the maximum position in an overall portfolio.

Lesson No. 2: Don't buy more house than you can afford.

Turner, the Chicago book publicist, regrets taking on an interest-only mortgage and buying more home than she could afford. The house the Turners paid $447,500 for in 2005 is now on the market for $309,000. "We were victims of our own optimism, combined with terrible timing and a terrible real estate and financial market," Turner says. "It was the 'perfect storm' for ruining us financially."

The Turners' bailout will come from her parents, who have no debt, stellar credit, and enough cash to make a down payment on a new, cheaper house in another Chicago town. In hindsight, Turner wishes she wasn't so blasé about money and had set a spending plan. (See Lesson No. 3.)

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