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This Could Be the Biggest Mistake You'll Ever Make

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People may or may not learn from their own mistakes, but apparently, the idea that people learn from other folks' mistakes is a myth.

OK, maybe that's not fair, but it was hard for me to avoid coming to that conclusion when I was looking over an email from Fidelity's PR crew the other day. Every quarter, Fidelity data-mines its 401(k) records and issues a little report on trends in 401(k)-land. And while Fidelity always -- of course -- put its own corporate spin on things, its database of 11.2 million participants is big enough to be a pretty good indicator of what's going on out there.

There are a bunch of interesting data points in this quarter's missive, and I'll be writing more on some of them in the next few days, but one in particular jumped out at me on first read: In the second quarter of 2009, 8% of dollars contributed to Fidelity-administered 401(k) plans went to the participant's employer's stock.

That may not sound like a lot, but it's enough to worry me -- lots of 401(k)s don't offer a company-stock option, so that 8% number is a lot higher among people who actually have the option. Haven't those folks been watching the news?

Too many eggs, not enough baskets
As far as I'm concerned, holding your employer's stock in your 401(k) is one of the biggest mistakes you can make with a retirement plan. The reason is pretty simple: Even if you don't own a single share of your employer's stock, your financial exposure to the company is already huge -- you work there!

But it often doesn't look like a mistake to folks until it's too late. In fact, it might seem like a really good idea, especially if you work at a blue-chip like ConocoPhillips (NYSE: COP  ) or Procter & Gamble (NYSE: PG  ) . After all, the odds that those companies will go the way of Enron seem really low.

Of course, that's what the folks at Bear Stearns said.

In all seriousness, I don't think either of those companies is going away anytime soon. (In fact, I think there's a decent case to be made for buying both of those stocks right now.) But that doesn't mean betting your future on their stock price is a good plan. After all, plenty of big names have gotten clobbered in the past year -- and in many cases, their employees' 401(k) balances got clobbered as well:

Company

Percentage of 401(k) Assets in Company Stock

Decline From 52-Week High

Bank of America (NYSE: BAC  )

31%

57%

ConocoPhillips

50%

48%

General Electric (NYSE: GE  )

56%

53%

Alcoa (NYSE: AA  )

20%

58%

Target (NYSE: TGT  )

46%

29%

Procter & Gamble

93%

29%

Sources: Yahoo! Finance, Brightscope.com. Data as of Aug. 13.

For comparison, the 401(k) stalwart Vanguard 500 Index Fund (VFINX) was down about 22% from its 52-week high. And with a little work, it's not hard to outperform the S&P 500 over time while staying well diversified.

But most of those stocks will come back!
Maybe so. But imagine if you'd been working for GE for the last 30 years and investing the majority of your retirement savings in GE stock. You would have been feeling pretty good about things -- until the past year or so.

Now imagine that you're retiring in a month. See, this is where even great companies' stocks can end up being a retirement disaster -- because even great companies hit rough patches. And sometimes not even a dramatic comeback will save you. Ford (NYSE: F  ) stock has been going gangbusters since the market lows in March -- but it's still down more than 11% from its 52-week high and more than 60% from its levels in 1999.

And if you'd been investing all of your 401(k) contributions in Ford every month for the past 15 or 20 years, and you were looking to retire soon, you'd probably be pretty unhappy with the overall performance of your portfolio. When there are so many great stocks out there, are you really willing to bet your future on your employer's?

Want a better way to invest your 401(k) balance? Check out the model portfolios from the Fool's Rule Your Retirement crew -- they're easy to understand, optimized for long-term success, and adaptable to almost any plan. Grab a free trial now for 30 days of complete access.

Fool contributor John Rosevear owns shares of Ford. The Fool owns shares of Procter & Gamble, which is a Motley Fool Income Investor recommendation. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (30) | Recommend This Article (88)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 14, 2009, at 4:41 PM, Gryphon433 wrote:

    There should be a law that limits investments in employee company stock to 10% of the value of the 401K. It is absurd and dangerous to place so much value in a single investment particularly in a retirement account.

  • Report this Comment On August 14, 2009, at 4:48 PM, Fool wrote:

    Just another 20/20 hindsight article!

  • Report this Comment On August 14, 2009, at 5:01 PM, RobertDennisCom wrote:

    They should only be able to put the employer matching amout in company stock.

  • Report this Comment On August 14, 2009, at 5:56 PM, KeitaiOtaku wrote:

    I couldn't agree more with this article. I dropped all 401K contributions to my company 7 years ago, pulled the money out of the company sometime after that. My job is already a massive trust and investment in my company.

  • Report this Comment On August 14, 2009, at 6:03 PM, AubieFool wrote:

    I think the people who work at a given company may know it better than most and should be free to invest there in any amount they care to. The nanny staters who advocate laws that would dictate how one invests his own money really chap my hide. Stick to your own knittin'.

  • Report this Comment On August 14, 2009, at 6:39 PM, NotJesseL wrote:

    I don't agree with AubieFool. Most employees at Enron did not have a clue about their company until it was too late. Also, an employer can exert undo pressure to invest in the company's own stock on its employees. This is probably illegal, but hard to control. Sometimes it is very hard to know the people, things, and companies you are closest to. Your department might be doing great, but the company might be doing lousy. So if one wants to take a flyer on your employer, maybe one should stick to the trading account rather than retirement account.

  • Report this Comment On August 14, 2009, at 6:43 PM, pk50 wrote:

    Good points here. Keep in mind that the 8% number probably reflects that some companies only match wholly or in part with company stock. Employees may not be as dumb as we make them out to be. They may have no choice when it comes to the company match. When I worked for such a company, as soon as I was able, I redeployed the company match stock into other investments.

  • Report this Comment On August 14, 2009, at 6:49 PM, TMFMarlowe wrote:

    For what it's worth, I don't think the practice should be banned or limited, but I do think plan sponsors should be really really clear (in their own minds, with internal constituencies, and with their participants) on the risks of including company stock as a 401k option and should resist the (often heavy) internal pressures from senior managements to do it. It's not in the participants' best interests.

    Thanks to all for reading.

    John Rosevear

  • Report this Comment On August 14, 2009, at 6:53 PM, TMFMarlowe wrote:

    pk50, years ago I worked for a big 401k provider and I saw the internals that went into reports like this one. Look at the numbers I mentioned above for GE and PG... now imagine what they were like at places like GM...

    Thanks for reading.

    John Rosevear

  • Report this Comment On August 14, 2009, at 7:46 PM, ralphie1954 wrote:

    Ten years ago I was offered an IPO with my employer and I invested what I had on hand. A few weeks later they returned my money saying it fell through. Good thing, my employer was Adelphia Cable Communications.

  • Report this Comment On August 14, 2009, at 8:12 PM, CoastalTrader wrote:

    This is indeed a problem. My company pays it's match in company stock and despite the fact that the company is fiscally conservative and and has whupped hell out of the S&P forever it's a bad deal.

    I would love to buy company stock but because they do it automatically, my exposure is too high and the sells always hit the first shares first. I am forced to play trading games holding it for a while and looking for opportunities to sell without accumulating too much. Unfortunately, I cannot buy company stock as I see fit.

  • Report this Comment On August 15, 2009, at 1:25 AM, tomd728 wrote:

    Anyone unable to attach value and growth to their Company stock should be putting their 401K to work

    in another vehicle within the 401K. What is all the chatter about......and while I'm at it.. can't make the assesment of their own company in the usual due diligence fashion ? Get into cash vehicles quickly in the form of Money Market Funds !

    Wow......! That was easy.

    Tom

  • Report this Comment On August 15, 2009, at 7:05 AM, gjohns17 wrote:

    Back in the 70's, when I started working for Ford Motor, all the senior employees were getting $2 a share for their Ford stock dividend. They told me to do nothing but buy Ford stock and by the time I retired I would be making more a year from dividends than my salary not including the pension! Most people back then were not stock market savy so I did just that and now you know the reason for this article!

  • Report this Comment On August 15, 2009, at 10:57 AM, dvdcunn wrote:

    Back in the late 90s Pfizer stock was soaring like a rocket. Way outperforming the market. Most of us could not resist putting all our 401K in PFE then. The ones who got out when the climb stopped did very well. Those that stayed in went from 51 to 15. Early employees of Microsoft became very wealthy by keeping their 401Ks inMicrosoft. Good sense should prevail.

  • Report this Comment On August 15, 2009, at 4:02 PM, Glycomix wrote:

    This sounds like a tease. Yes. There are some impressive opportunities. However, you didn't give anything away. Have to buy "secret gems" to see what you're talking about.

  • Report this Comment On August 21, 2009, at 1:00 PM, ronca66 wrote:

    There is an exception to every rule. A co-worker who kept his eye on the company stock, moved his 401k money into company stock when it fell, and out of company stock into cash when it rose, and retired a millionaire. He knew the behavior of the stock in his own company better than any other stock in the market and took advantage of that knowledge. And no insider trading because he was just an hourly employee who paid attention.

  • Report this Comment On August 21, 2009, at 2:14 PM, zerozero3 wrote:

    Okay, I confess, I was monumentally stupid and did just this - invested in my blue chip company stock within my 401K. Biggest mistake of my investing career. I thought I knew the business from a great perspective - who knew that employees are often the first to believe (since they work for the company after-all). For me it was $100K gone in a "heart beat". Took many years to climb out of that hole.

    This is one of the many reasons I actually subscribed to MF way back when - I read their rationale for investing and they said "do not do this". Too late for me, but it confirmed MF might be a source for good advice.

    Thanks for this article and thanks MF. Never again!

  • Report this Comment On August 21, 2009, at 3:06 PM, BeachPHool wrote:

    Those that do invest their 401K money in their own company's stock just go to prove the old saying: "A fool (lower case "f") and his money SHOULD be parted."

  • Report this Comment On August 21, 2009, at 6:42 PM, antiAARP wrote:

    Tha AARP propaganda at the head of your article really detracts from its impact.

  • Report this Comment On August 21, 2009, at 8:43 PM, PonderingItAll wrote:

    Unless you have a horribly restrictive 401K plan, it is crazy not to contribute the maximum you can. You can spread it between the various options to make sure it is diversified, but the main benefit is to just get those funds into a tax-deferred account. When you leave that job, you can roll it over into your own tax-deferred IRA. If that account is at a decent brokerage house, you will be able to invest in any stocks, bonds, CDs, or mutual funds you like.

    The difference between taxed and tax-free account growth over the years can be enormous, and the contribution limits for 401Ks are much higher than for normal IRA accounts.

  • Report this Comment On August 22, 2009, at 7:45 AM, TmanJoe wrote:

    The article contains sound advice. In 1987 I was made Treasurer of a Fortune 500 firm. I proudly told the HR VP that I invested in the company stock prior to starting the job. He told me I was nuts to do that. "You all ready have a big bet on the company in your job." Time proved him right and me sadly wrong.

    Long term the firm did ok but it did not do me any good when I lost my job in a merger before the big gain in the stock.

  • Report this Comment On August 22, 2009, at 1:39 PM, jbonefish wrote:

    Even with a great 'inside' perspective on a company's business (order backlog, sales mix, new product adaption rates) you can get side-swiped by another business unit's failings. No reason to invest money in your employer beyond what you would normally contain in a diversified portfolio.

    Case in Point: GE Capital.

  • Report this Comment On August 22, 2009, at 2:46 PM, cbkaty2008 wrote:

    "There should be a law that limits investments in employee company stock to 10% of the value of the 401K. It is absurd and dangerous to place so much value in a single investment particularly in a retirement account."

    .......Americans have every right to make dangerous and absurd investments.....Don't we have enough laws for goodness sakes?

  • Report this Comment On August 22, 2009, at 3:20 PM, Lee2009 wrote:

    I work for bank of America so I relate to several things in the article. I'm surprised by the high percentage of stock in our 401Ks because back around the time of Enron, a limit of 25% of our portfolio in BAC stock was put into place. Of course there also followed a period of a couple years when out matching funds had to be taken in stock. My view had been to get rid of the stock as soon as I could. However when prices dropped recently to under $3 (and my 401K was down about 30%), I moved about a quarter of my funds into the stock. Now my portfolio is back to nearly where it was before the crash. However since the stock seems to have stabilized for now, I'll be looking to move it out into something else (until the price drops again ).

  • Report this Comment On August 23, 2009, at 8:54 AM, Ken2009 wrote:

    I worked for Public Service Co of Colo and had many shares of company stock. After the executives drove the price to 50% of its former value, I sold. HOWEVER, not having it in company stock is no guarantee, because subsequent investments lost another 40%

  • Report this Comment On August 23, 2009, at 5:05 PM, dalarson wrote:

    "There should be a law that limits investments in employee company stock to 10% of the value of the 401K. It is absurd and dangerous to place so much value in a single investment particularly in a retirement account."

    It is absurd to keep adding laws to protect people from themselvs. America became a great country due to people taking risks. Some risks lead to success, some lead to failure. There is no shortage of investment advice available to everyone to use to make an informed investment decision.

  • Report this Comment On August 24, 2009, at 1:10 PM, ahoythere wrote:

    dalarson said it all...

    "It is absurd to keep adding laws to protect people from themselvs. America became a great country due to people taking risks. Some risks lead to success, some lead to failure. There is no shortage of investment advice available to everyone to use to make an informed investment decision."

    The more the government aims to protect the populace, the more the populace is dependent on the government.... Wait, yah think that might be what they want???

  • Report this Comment On August 24, 2009, at 5:30 PM, bahrb wrote:

    While I agree that it is best only to invest between 3% & 10% maximum in your own company stock, you should have some stake in your own company. If only for individual incentive to contribute to a company you believe will succeed. If you are concerned about your company, then obviously holding no company stock would be justified.

    The companies discussed and numbers shown in this article are anecdotal. Anything can be justified by selecting specific companies and time periods to arrive at favorable stock percentage numbers. For example while the S&P 500 is now only down 22% over the past year, it was actually down 55% from it's 2 year high to recent low and 45% from the 52 week high to the recent low. Many 401k investors bailed from their equity holdings this spring even when holding the S&P 500 because the values dropped so much. With proper asset allocation guidance, holding a small portion in your own company stock should not be a catastrophic event to your 401k.

  • Report this Comment On August 28, 2009, at 4:01 PM, TMFMarlowe wrote:

    bahrb, "proper asset allocation guidance" or no, if your company hits the skids and you get laid off, losing a chunk of your retirement savings when their stock tanks adds insult to injury. It's an unnecessary, largely unjustifiable, risk, and "proper asset allocation guidance" would point out that you are already extremely exposed to the risks of investing in that one company just by working there.

    Thanks for reading.

    John Rosevear

  • Report this Comment On September 02, 2009, at 5:42 AM, jwhenry0209 wrote:

    If anyone has had any luck with any of these companies, could you please post it for the ones that cannot find one to work with you. We've almost lost once and just got a second chance that want last long so I need to get something done now, so if anyone knows the right number to call, i am sure a lot of people that hasn't found them would appreciate it but check out http://www.obamamortgagerelief.org/.

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John Rosevear is the senior auto specialist for Fool.com. John has been writing about the auto business and investing for over 20 years, and for The Motley Fool since 2007.

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