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Diversifying

In a number of posts, I’ve referenced asset allocation. This week, with the collapse of Bear Stearns, let me remind you that putting all your eggs in one basket is inviting a visit from the black swan. To make matters worse, employees tend to load up on their own company stock, having unconscionable percentages of their 401(k) funds invested in the stock. So for these people, on the same day they find themselves unemployed, their life savings has just been trashed.

I understand the urge to invest ‘in what you know’, as if one can really know every aspect of the company for which they work. I also know that many firms have stock purchase plans where you are permitted to buy company shares at a discount. Lastly, 401(k) matching funds are often deposited as shares of the company stock. Resist this urge, and reduce your risk. If you can’t afford to watch your company stock go right to zero, you have too much. We all should have learned from the tech bubble to limit shares in any one stock (or sector, for that matter) to a small percentage. For many, it’s too late, just make sure you are not next.

Joe

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