The Third Pig

When Diversification is Good

Posted by Ben Taylor on April 21, 2008 06:17 PM


In case you haven’t heard the old saying, “Don’t put all your eggs in one basket”, the collapse of Bear Stearns (BSC) is a great example of why the phrase exists. As you may recall, last month Bear’s stock plummeted to less than $3 per share from a 52-week high above $150. Although Bear employees seemed to be a little better off than the former employees of Enron and Worldcom whose retirement savings were obliterated by the collapse of those companies, as Bear’s employee stock ownership plan accounts for only 3% of total shares.

However this belies the point. About 1.5 million Americans are invested heavily in their employer's stock and another 11 million Americans participate in employee stock ownership plans and the like. Should these companies fail, and the stock of those companies fall significantly, you’ll see a lot of folks working in their golden years. Although I believe in prudent concentration in one’s investment portfolio, there is such a thing as too much of a good thing. The best actions an employee can take is not to make their own company’s stock more than 10-15% of their overall portfolio.

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