The New Commonsense Guide to Your 401(k): Rebuilding Your Portfolio From The Bottom up

Chapter 63. What Not to Buy

THERE ARE SOME INVESTMENTS that do not belong in your retirement plan. Chief among them is stock in your employer's company, insurance products, and municipal bonds.

Many companies offer company stock as one of their 401(k) plan options. Do not choose it. You already have your livelihood tied up with your employer, who pays your salary and offers you employee benefits such as health care and holiday and vacation pay. You do not want to have your retirement savings tied to the fate of the same company.

If your portfolio's value rests on a single stock, you risk financial disaster if the company runs into trouble. The first "shock" in this regard came in the early to mid-1990s when IBM stock was golden and the company prided itself on never laying off an employee. Then thousands of employees were forced out of Big Blue at the same time that the company's stock hit the skids. But this was a mild example compared to what was to come.

Remember what happened to Enron employees who invested most or all of their 401(k) money in Enron stock? Ten years ago, Enron was touted as the company of the future. Unfortunately, I was an investor in Enron when the stock plunged from $90 a share in August 2000 to less than $1 a share in November 2001. Sure it hurt my portfolio. A big chunk of it simply disappeared. But thousands of Enron employees were wiped out. And we have many more recent examples of companies like Lehman Brothers, American International Group (AIG), Citibank, ...