We’ve all heard it before: “Don’t put all your eggs in one basket.” When it come to investing, that’s certainly true. If you invest in just one stock (e.g. Enron) and that company blows up (come on Justin, Enron would never… KABOOM!), all your eggs are now splattered all over Houston.
Consciously investing everything in just one stock is pretty uncommon, but a lot of people unknowingly do it through their company’s 401k and/or Employee Stock Purchase Plan (ESPP). Most people feel good about the company they work for and feel good about the company’s growth prospects, etc. So they invest in company stock inside their 401k, they might get 401k matches from their employer in the form of company stock and/or they are inclined to purchase discounted shares of company stock through their ESPP. A little here and a little there and pretty soon a good portion of their retirement savings is tied up in one company. So their present
(monthly paycheck) and their future (retirement savings) are both highly dependent on the success of just one company.
It’s hard to diversify your present monthly paycheck, I understand. However, it’s easy to diversify your retirement savings by owning a variety of index mutual funds or Exchange Traded Funds (ETFs), such as:
--Large company US stocks
--Small company US stocks
--Foreign stocks from developed countries
--Foreign stocks from emerging countries
--Intermediate term bonds
By diversifying you will lose out on the chance of having picked the one investment that gets you a super duper high return, but you also avoid having chosen just one investment that ends up being your “Enron”. Diversification is not a guarantee against loss, but it is an effective strategy to help you manage investment risk.
You can’t control the market, but you can control how diversified your investments are.