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This Could Be the Biggest Mistake You'll Ever Make

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 that conclusion as I read an email from Fidelity's PR crew not long ago. 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 -- puts its own corporate spin on things, its database of 11.1 million participants is big enough to be a pretty good indicator of what's going on out there.

There are a bunch of interesting points in these missives, but one in particular jumped out at me on first read: In the third 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, even if your employer pays the 401(k) match in company stock, holding it for the long haul 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 Boeing (NYSE: BA) or American Express (NYSE: AXP  ) . 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 that either of those companies will go away any time soon. But that doesn't mean betting your future on their stock prices is a good plan. After all, plenty of big names have experienced big drops since the S&P 500 peaked on Oct. 9, 2007, the recent rally notwithstanding. And in many cases, their employees' 401(k) balances got clobbered as well:

Company

Percentage of 401(k) Assets
in Company Stock

Decline Since Oct. 9, 2007

Boeing

15%

(23%)

American Express

24%

(27%)

Capital One Financial (NYSE: COF  )

18%

(36%)

National Oilwell Varco (NYSE: NOV  )

10%

(41%)

U.S. Steel (NYSE: X  )

8%

(33%)

Medtronic (NYSE: MDT  )

30%

(16%)

Sources: Yahoo! Finance, Brightscope.com. Data as of market close on April, 6, 2010.

But most of those stocks will come back!
Maybe so. But imagine if you'd been working for General Motors for the past 25 years, and investing a big chunk of your retirement savings in GM stock, as many folks did. You would have been feeling pretty good about things -- until a few years ago. And now you'd have nothing.

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. Chemical giant DuPont's (NYSE: DD  ) stock price has brought impressive gains over the past year -- but the chemical giant's share price is still down more than 25% from its highs in early 2008.

And if you'd been investing all of your 401(k) contributions in that stock for the past decade or more, 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 the ups and downs of 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.

This article was originally published Aug. 14, 2009. It has been updated.

Fool contributor John Rosevear has no position in the companies mentioned. American Express is a Motley Fool Inside Value recommendation. National Oilwell Varco is a Stock Advisor pick. The Fool owns shares of and has written puts on Medtronic. The Motley Fool has a disclosure policy.


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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 April 08, 2010, at 8:07 AM, funfundvierzig wrote:

    Hapless investors who put their savings in the moribund stock of the poorly managed DuPont Company would have ended up with an Average Annual Total Return of MINUS 3.06% for the ten year period ended 12-31-09. For the three-year period ending 12-31-09, the Return would have been MINUS 7.53%! And that's with reinvestment of DD dividends.

    ...funfun..

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John Rosevear
TMFMarlowe

John Rosevear is the senior auto specialist for Fool.com. John has been writing for the Fool since 2007. A lifelong car nerd, his current daily driver is a Cadillac CTS-V.

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