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Finance For Dummies

Finance For Dummies offers personal finance information on investing, retirement investing, finance, insurance, credit cards, loans and more. Personal finance education is our goal.

Sunday, June 11, 2006

Company Stock in Your 401k

Rule #1 of Investing is to be diversified. However, millions of employees who have the option of owning their company's stock in their 401k do own the company's stock. That is not a problem--the problem lies in the fact that they mistakenly believe that owning their company's stock is a safe way to invest a major portion of your 401k.

After the scandals of 2001-2002 (see Enron, et al), many were hoping that investors learned their lesson vicariously through other peoples' misery. However, 4-5 years later people have not learned that lesson and continue to expose themselves and their families to an extraordinary amount of risk in their 401k portfolio. So if you do have company stock in your 401k be aware that if your company is under scrutiny of the SEC or the investing community for fraud, or even worse allegations, you could see your 401k's balance go from a healthy amount to you putting off retirement for a few extra years because your balance has plummeted.

I bought Enron stock on the way down before all the facts came out of their malfaesance. I bought it at around $9.00 and rode it all the way to $0.22. Luckily, I did not have a lot of money invested in Enron. I learned my lesson not to buy into a stock that the bottom is falling out of (there is a reason the bottom is falling out). Hopefully, with this information you will be prepared to diversify your 401k portfolio and not put all your faith in your company's stock to lower risk in your 401k.

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