| Gary Foreman is a former Certified Financial Planner (CFP) who currently writes
about family finances and edits
The Dollar Stretcher website
http://www.stretcher.com. You'll find hundreds of FREE
articles to stretch your day and your budget! |
Much
has already been written about the fall of Enron. Most has been on
the political and business ramifications and deciding who to blame.
I've been surprised to see that there hasn't been much that would
help the average Joe protect himself from the next Enron. So let's
see what lessons can be learned from the current mess.
There will always be bad guys in this
world. Insiders will know more than you do. Some will use that
knowledge to their advantage. And, some won't care if you get hurt
while they make money. That's no surprise. Never trust the insiders
to be on your side. Always take steps to protect yourself. You may
be fortunate enough to avoid the bad guys. But you still need to be
cautious.
If you can't explain what a company
does in two sentences you shouldn't invest in it. Smoke and mirrors
are only fun at the carnival. Razzle, dazzle companies often blow
up. Complicated dealings are a perfect place to hide mischief. If
you don't understand what a company is doing you won't be able to
tell whether they're doing it well. You shouldn't invest in anything
where you can't judge their performance.
Even the biggest of companies aren't
immune from failure. Sure, they're safer. But not 100% safe. In
fact, it's easier for a big company to hide troubles. At least until
they become really serious.
Putting all your eggs in one basket
is dangerous. It is not a good idea to have all of your assets
invested in one company no matter how good that company is. Even if
it's your own business it is wise to try to have your money invested
in a number of different things.
Diversification is the most important
tool for small savers and investors. It minimizes your damage when
catastrophe strikes a company. And, it also provides for a steadier,
more dependable growth of your money.
Mutual funds can protect you from
being overly exposed to one bad apple. Even if a fund does own the
next Enron, it's only a small portion of the fund.
Diversify your 401k plan. You
shouldn't put all of your retirement money in one investment. You
should have a variety of stocks, bonds and guaranteed investments.
And even within each category you should have a variety of stocks
and a variety of bonds.
You don't want to invest too much in
the company you work for. If something bad happens to the company
you could lose your job and your savings. Even if the future looks
bright for your employer it's a bad idea.
Some employers will automatically buy
company shares with their contribution to your 401k plan. You can
still protect yourself from disaster. Use your contribution to buy
something besides company stock. And sell the company shares in your
account as soon as you can to keep your exposure to a low level.
These two steps will provide needed diversification.
 If you don't have control over an
investment you've increased it's risk. Some 401k plans place limits
on how soon you can sell the company's contribution. That means that
you can't really count on the value of company contributed shares
until you have the right to sell them.
When plan administrators are changed
most 401k plans will freeze your investments for a short time. A lot
can change in that time. If you face a freeze, you should consider
moving the vast majority of your money into the safest place you can
find. Often that's a CD or money fund within the 401k. You can
always rebuy the stock or mutual once you regain control of the
account.
Counting on others to protect your
money doesn't always work. Even the most honest accounting and
regulatory groups can make mistakes. And, some of them will even be
dishonest (gasp!). Putting all of your money in one company and
assuming that the auditors will catch any problems is foolish.
A big failure like this doesn't mean
that you should avoid Wall Street and all stocks. Doing that would
eliminate the best way to grow your money. Stocks have the best long
term growth rate of any investment category.
We'll probably see some changes in
the law. But you don't need to wait for Congress to protect your
money. You can use common sense and diversification to protect you
today. Why not take a look at your statements and make sure that you
won't be a victim of the next big business flame out?
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