The Simple Dollar is running a series in which we re-evaluate Money Magazine’s “25 Rules To Grow Rich By”. One “rule” will be re-evaluated each weekday until the series concludes; you can keep tabs on the action at the 25 Rules index.
Rule #8: Invest no more than 10% of your portfolio in your company stock – or any single company’s stock, for that matter.
I like to refer to this as the “Enron rule,” as the reason for this rule was made painfully clear by the collapse of Enron and the resulting loss of the retirement plan of thousands of former Enron employees.
This also happens to be the first rule that I strongly agree with. In fact, I don’t think this rule goes quite far enough, especially for new investors. I will personally never put more than 5% of my stock holdings in one single stock, but that’s mostly due to the fact that I’ve watched multiple companies that I thought were rock-solid and set for long term growth go completely out of business in less than a year.
The fact of the matter is that no situation is foolproof and, unless you intimately know the inner workings of an organization, you should never put more than 5% of your portfolio in that company in the long term. Let’s just subtly edit that rule, shall we?
Rewritten Rule #8: Invest no more than 5% of your portfolio in your company stock – or any single company’s stock, for that matter – unless you are exceptionally well-educated on the company; even then, don’t go above 10%.