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 big, sturdy firm like Merck (NYSE:MRK) or National Oilwell Varco (NYSE:NOV). After all, while business cycles happen, 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. (In fact, I think there's a good case to be made for buying one, and maybe both, of those companies right now.) But that doesn't mean betting your future on their stock prices is a good plan. After all, plenty of big names have seen 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:

Sources: Yahoo! Finance, Brightscope.com.

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.

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. Take JPMorgan Chase (NYSE:JPM), where 23% of 401(k) assets are invested in the company's stock. The stock price is pretty close to its October 2007 levels -- around $45 -- as I write this, but it took a heck of a dive in the wake of the banking crisis, bottoming at $14.96 last March.

JPMorgan Chase has enjoyed a nice recovery, but if you'd been investing all of your 401(k) contributions in its stock every month for the past 10 years, and you had been scheduled to retire last March, you would have been pretty unhappy with your portfolio balance. 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?

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

Fool contributor John Rosevear has no position in the companies mentioned. Best Buy is a Motley Fool Inside Value selection. Best Buy and National Oilwell Varco are Motley Fool Stock Advisor recommendations. The Fool owns shares of Best Buy. The Motley Fool has a disclosure policy.