Money Magazine has done a good job of assembling five simple tips for starting and maintaining a great 401(k) retirement account. The first tip was to save early and often and the second was to spread your money around with a smart diversification strategy. Here’s the third tip.
When you work for a company, it’s easy to feel you know your organization really well. You may get daily communications from your executives extolling the indestructability of the corporation. Or maybe you really do work for a company that has a bright future.
But it’s risky. And by working at the company, you’re accepting risk associated with your salary. You don’t need the extra risk of being overly exposed to your company in your portfolio.
Chances are you know someone who worked for a start-up in the late 1990s. The future looked bright, but companies were using the buzz to their advantage, compensating employees with stock when there was no cash. And of course, everyone knows the story of Enron’s stock and the employees who lost (paper) millions.
The chart to the left contains some statistical details outlining why you should not take on the extra risk by overly investing in your company — or any one company’s — stock.
How about my company? If I take my employer’s full 401(k) match, which is up to 4% of my salary, half of that match is invested in a company stock fund while the other half is invested according to my asset allocation instructions. I cannot change the company stock portion of the investment without cashing out the 401(k) or rolling it over if and when I leave my current employer.
Updated January 16, 2010 and originally published July 26, 2006. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @flexo on Twitter and visit our Facebook page for more updates.