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Question:
A
group of us put quite a lot of our 401(k) money in
stock of the company we work for. Now we've formed
a "study" group to try to determine if that is smart.
Susan
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Answer:
Dear
Susan,
You're
absolutely on the right track -- discussing this strategy
with your co-workers. I imagine your concern is the
result of hearing so much about the retirement plans
that got wiped out at Enron and WorldCom during the
past year. Many of those employees had more than half
of their money in their company's stock. And, in some
cases, they were unable to sell their stock because
of age, tenure or other restrictions. Today, almost
28% of 401(k) plan assets are still invested in employer
stock.
Beyond
The Bad News...
Contrary
to the negative publicity about Enron and other corporations,
it's not unheard of for a company's stock to do better
than the market. According to a recent Institute of
Management & Administration (IOMA) study of 327 companies,
on average they outperformed the S&P 500 Stock Index
during the 12 months ended December 12th.
Of
course, that doesn't mean the 401(k) assets of these
companies were up in value. In reality, they were
down 12.1%. But the S&P 500's performance was significantly
worse -- it fell 19.5% during the same period.
You
didn't mention the company you work for...if it has
consistently posted positive total returns over time,
then you should indeed have a portion of it in your
plan. Several well-respected companies, all of whom
have 401(k) plans for their employees, reported total
returns for last year well above 40%.
The
5% Rule...
However,
it is risky to have more than 5% to 10% of your portfolio
invested in any one stock -- and that includes your
company's stock. Diversification remains a key way
to protect your portfolio.
Of
course, if you receive company stock as a matching
contribution in your plan, you have no choice. But
you can make certain that any other money you have
is solidly diversified.
To
study possible stocks to invest beyond your company's,
click on Research
Stocks here at BUYandHOLD. Good luck!
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