The One Thing You Should Never Do

Growing up in Cincinnati, Ohio, you learn two undisputed "truths" from an early age:

1. You live in the best city for high school football in the country.
2. You need to own Procter & Gamble (NYSE:PG) stock.

Both truths are pretty self-evident, but I'm here to talk about investing, so I'll focus on No. 2.

P&G is by far the largest and most successful company headquartered in Cincinnati and is the city's fourth-largest employer, so there are pretty good odds that if you don't work there yourself, someone in your immediate family does.

Then there's P&G's wild success as an investment -- a one-time $100 investment on December 1, 1970, would be worth about $3,400 today, while the same investment in the S&P 500 would be worth about $1,250.

Combine Cincinnatians' personal ties to the company, general familiarity with P&G brands, and the past success of the stock, and it's easy to see why Cincinnatians would be drawn to P&G stock. Case in point: Fully 93% of P&G employees' 401(k) assets were invested in P&G common stock as of June 2007, according to Brightscope.com, an independent provider of 401(k) plan ratings.

Owning blue chip "hometown" stocks, whether it's P&G in Cincinnati, Target (NYSE:TGT) in Minneapolis, or DuPont (NYSE:DD) in Wilmington, can be a good strategy, but sadly, too many investors get themselves in trouble by owning these stocks, whether they know it or not.

Learning the hard way
Remember that little financial crisis we had about a year ago? I know, the market's rebound over the past nine months may have made it easy to forget, but folks in Detroit who owned General Motors or Seattleites who owned Washington Mutual sure haven't forgotten.

Grace Pace, 73, who was interviewed by The Wall Street Journal in October 2008, hasn't forgotten either -- years earlier, her husband bought shares in a local bank as a point of family pride. The local bank was eventually acquired by Wachovia, whose dividends at one point provided a third of Mrs. Pace's income. That was until Wachovia ran into trouble and eliminated its dividend before being acquired by Wells Fargo (NYSE:WFC) last December.

Losing a third of her income at the discretion of Wachovia's board of directors forced Mrs. Pace to make a very tough and emotional reassessment of her retirement plans. Hopefully Mrs. Pace has since encountered better fortune, but her tragic example goes to show how overreliance on a single stock can end up causing enormous pain.

Unfortunately, she is not alone. According to a recent Federal Reserve study, 36% of households that own shares directly hold shares in only a single company. Here's one reason why that might be the case.

Avoid the easier wrong
Today, with corporate pension plans going the way of the Dodo bird, everyday Americans like you and me are forced to save for retirement using our companies' 401(k) plan, where the onus is on us to make prudent financial decisions. That's not a simple task, not even for a professional investor like me, so I'm never surprised when I see employees taking the familiar and easy route of choosing their own company's stock as an investment.

Data provided by Brightscope.com.

None of this is to say that Lowe's, Wal-Mart, Best Buy, or even Procter & Gamble will be poor investments going forward, but it's apparent that their employees' financial well-being is too dependent on the companies' success, and that they are exposing their future and their families' future to an unnecessary potential heartbreak.

Time to break the chains that bind
Regardless of how proud you are of a hometown company or the company that you work for, putting too much money behind a single investment is the one thing you should never do when it comes to planning for retirement. Oh sure, feel free to own shares in your hometown company -- indeed, I own shares of P&G -- or your employer's stock, but as the fallout from the financial crisis taught shareholders of General Motors, Washington Mutual, and Wachovia, there is no loyalty when it comes to investing. Bankruptcy courts won't give you any more money (if any at all) whether you held the stock for 10 years or 10 minutes.

If your portfolio is too reliant on one stock, now's the time to divorce yourself from the emotional attachment to that stock and begin to diversify your portfolio. Want to get started? Sign up for our Motley Fool Rule Your Retirement service, where advisor Robert Brokamp will help you learn how to use stocks, bonds, mutual funds, and more to set up a portfolio that you can be comfortable with.

Click here now to get started.

Fool analyst Todd Wenning is looking forward to some Skyline Chili. He owns shares of Procter & Gamble (a Motley Fool Income Investor pick) like any good Cincinnatian (in moderation, of course), but of no other company mentioned. Best Buy is a Motley Fool Stock Advisor selection. Best Buy, Lowe's Companies, and Wal-Mart Stores are Motley Fool Inside Value recommendations. The Fool owns shares of Best Buy and Procter & Gamble. The Fool's disclosure policy is always well diversified.