Too Much of a Good Thing

Like all good things, investing requires moderation. For example, owning too many shares of your company’s publicly traded stock in your 401(k) plan can hurt your retirement income prospects. Enron employees learned this painful truth in the early 2000s when the company’s stock, in which many of them were heavily invested, became worthless.

CAUTION AHEAD

Since then, companies have increasingly avoided offering their own stock to 401(k) plan participants. While employers can’t aggressively tout their own stocks, they can include them as an investment option or use them to match employee contributions. This can add up over time.

Owning too much stock in any single company is a lesson in how not to diversify. So it makes sense to monitor your 401(k) portfolio to make sure your holdings in company stock are appropriate for your time horizon, risk appetite and financial goals. Regularly rebalancing your portfolio to ensure diversification will help limit your risk.

DIVERSIFICATION MATTERS

Dividing your assets appropriately among the three major asset classes — stocks, bonds and cash investments — is the foundation for any investment strategy. Typically, younger 401(k) participants have the time to potentially outlast market volatility, so they can invest more aggressively. The closer you get to retirement, the more conservative your investment strategy should be.

Even within asset classes, you will diversify further with a mix of investments — or mutual funds that do the same. You can, for example, own domestic and international securities, fixed income investments that mature in anywhere from months to 30 years, and companies by capitalization (small-cap, mid-cap, large-cap). With so many choices, don’t let company stock dominate your holdings.