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Diversify Like There's No Tomorrow

Enron's 401(k) meltdown is the latest lesson in the importance of not keeping all your eggs in one basket.

Not too long ago, almost everyone was saying that



was an innovative, visionary company with a bright future.

Today your company might be getting the same praise. Maybe it's well deserved. But don't bet your retirement on it.

There's no such thing as a can't-lose company and you shouldn't invest all your retirement money on the prospects of any one business. Diversify like your life depends on it. Your retirement home at the beach certainly does.

Tragically, Enron employees saw their nest eggs disappear as the now-bankrupt company collapsed. More than half of Enron's 401(k) plan was invested in its own stock and employees weren't allowed to unload the shares they received as matching contributions in that plan until they hit age 50.

The folks in Washington are finally trying to do something about the risk that people are allowed to take in 401(k) plans. But you shouldn't wait for those bureaucrats to force companies to do what's in your best interest. It's time to figure out how to protect yourself from your own company's stock.

Here are four steps you can take to avoid an Enron-style disaster.

Start With A Solid Allocation

Enron's self-destruction was unusual but its 401(k) plan was not. Employee contributions were matched in Enron shares, while one of the investment options in the plan was also that now-reviled stock. Your 401(k) might have a similar setup. After all, about half of the 39 million 401(k) plan participants in this country have company stock available to them through matching, an investment option or both.

You just have to figure out how to avoid investing too much money in that one security. First, you'll need to start with a basic asset allocation. For example: If you're in your 30s and have decades to go before you retire, you could have 80% of your retirement money in stocks and 20% in bonds. And these days, many fund company Web sites, from

Vanguard to

Fidelity and on, have asset allocation tools to guide you.

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Don't Buy All The Stock You Can

Once you've settled on a mix of stocks and bonds, you should find out if your company matches your 401(k) contributions in stock. If that's the case, you don't want to select company stock as one of your own investment choices in the plan. That's especially true if the company prevents you from selling those matching contributions until you near retirement age -- like Enron did. And you don't want to buy even more of it through a stock-purchase plan or an outside brokerage account.

"The company will tell you they want the employee to have a vested interest in the company," says Michael Scarborough of the Scarborough Group, a firm specializing in 401(k) planning. "That's what you have a paycheck for."

Indeed, your livelihood is already tied to the success or failure of your employer. You don't want all your retirement assets harnessed to its boom or bust as well.

Sell High

Most people should have only 5% to 15% (maybe 20%) of their retirement money in a single stock. "Once you reach the 20% to 30% concentration level in any one stock, the risk in your portfolio starts to increase dramatically," says Bryan Olson, vice president at the Charles Schwab Center for Investment Research. "The risk starts to mimic that of the stock."

If a stock's soaring, you can quickly wind up with more than 20% in that one security. Instead, you'll have to teach yourself to trim that stock after it runs up. You should get in the habit of adjusting your retirement portfolio every quarter to match your original asset allocation. In fact, most 401(k) plans these days will let you move money around every day if you want.

You'll also want to see if your employer will let you move matches in company stock to other investments earlier than age 50 or 55. That would give you another way to diversify. A few plans even have what's called an "in-service withdrawal" option that will let you withdraw some of your 401(k) money before retirement. You then can roll that dough into an IRA for more flexible investing.

You're thinking: Why sell a stock that's soaring? What about all the money that I'll leave on the table?

True, you could lose a lot of upside by not betting the farm on a single stock. But you also have to think about all the downside you'll miss if that stock tanks. Think about that Porsche you might be driving when you're 65.

You can keep some of your 401(k) money in that stock -- just not all of it. Instead, you should go with at least one broad stock fund, like a Wilshire 5000 index fund, for maximum buoyancy. Think about it like this: Over the past two calendar years, one-third of individual stocks lost half of their value or more, but only one in 20 diversified stock funds lost that much.

Eliminate Redundancy Outside of Your 401(k)

If you have other investments outside of your 401(k), it's crucial that you analyze your whole portfolio. Your entire position in any one stock shouldn't exceed 20% of your entire portfolio. And if you already have a hefty helping of company stock and you work in, say, the telecom industry, you probably don't need to own telecom sector fund as well.

You could end up with too much money in that one sector. And everyone has seen what a lack of diversification can do to someone's retirement plans.

So the key is diversification: a recommendation that veteran investors have no doubt heard. But given how many people lost too much of their retirement savings in the Enron debacle, the recommendation needs not only repeating, but also an addendum: how to invest in the company where you work.

In keeping with TSC's editorial policy, Dagen McDowell doesn't own or short individual stocks, nor does she invest in hedge funds or other private investment partnerships. Dagen welcomes your questions and comments, and invites you to send them to

Dagen McDowell.