Why Not Buy A Single Employer Stock?

Dave explains to Joan why mutual funds are a much better investment than purchasing a single stock from her employer.

QUESTION: Joan asks why Dave is against buying single stock in your employer.

ANSWER: I’m not against it on a small basis.  Mutual funds have a much better rate of return as a whole with a lot less risk.  When you buy a single stock you’re betting the farm on one horse. 

You need to diversify.  Don’t put all your eggs in one basket because some idiot may drop the basket that lives on Wall Street!  Can you say Enron … Worldcom?

If you’re going to invest in your company, put no more than 10% of your retirement nest egg in it.  Most people who play single stocks just want to be involved in the prosperity of their company and that’s okay.  Just make sure you diversify the large majority of your investments in mutual funds.