Investment Tips – Remember Enron – Reduce Your Company Stock

Investment Tips – Remember Enron – Reduce Your Company Stock

I’m back with another new investing tip!  A recent copy of Forbes magazine has a list of 365 tips on investing to get rich.  Here’s my thought on one of their suggestions.

This investment tip this time from Forbes is: “Remember Enron, Reduce your Employer’s Company Stock in Your 401(k).”

Investment Tips – Remember Enron – Reduce Your Company Stock – Background

In case you’ve been living under a rock for a long while and aren’t familiar with the Enron story, I’ll give you a small background.  Enron was a famous energy trading company that seemed like it could do no wrong.  They seemed to be making money hand over fist.  Traders couldn’t get enough of the stock, and employees who had lots of this stock had dreams of retiring early and rich!  It was all just a little too good to be true.

You see, Enron was involved in one of the biggest financial frauds of all time.  They “cooked the books” by creating shell companies to generate fictitious profits for themselves.  Once this was discovered, the stock crashed and the company soon went bankrupt.  Employees that had most, or all, of their 401(k) allocated to Enron stock lost everything nearly overnight.  Many folks had their lives completely upended and completely changed for the worse.

Investment Tips – Remember Enron – Reduce Your Company Stock – What’s the Moral of the Story?

There are morals to this story.  Very specifically, it is extremely risky to hold a lot of stock in the company that you work for.  This is because if things at your company go from good, to bad, to worse, then you’ll get hit with a double whammy.  Your company stock value will likely drop dramatically.  This will substantially decrease your net worth.  And, you run the potential of losing your job!

The second moral is along the same lines but a little more broad.  You really should not have all your eggs in one basket.  The more you are able to diversify risk and have a broad asset allocation, the better equipped you are to make it through rough “investing patches” without losing all of your principal.

True, you’ll probably never get mega-rich by having a very diversified portfolio, but you won’t be on the bleeding knife’s-edge of risk takers either.

Investment Tips – Remember Enron – Reduce Your Company Stock – Final Thoughts

This is a simple investment tip that I believe everyone should follow.  It’s just too risky, from an investment standpoint, to have all your eggs in one basket.  If your one of the folks that has a huge holding of your current company’s stock in your 401(k), I’d recommend that you reconsider 🙂

Check out these other great MoneyAhoy posts:

Investment Tips – Never Lose Money Investment Tips – Don’t Mistake a Low P/E Ratio for a Value Stock Investment Tips – Know Your Risk Tolerance Investment Tips – Invest at the Point of Maximum Pessimism