The Elements of Investing

Chapter 3. DIVERSIFY

A very sad story illustrates the crucial need for investors to diversify their investment holdings. It concerns a secretary who worked for the Enron Corporation during its heyday in the late 1990s and early 2000s. Enron was one of the new-age companies that formed to revolutionize the market for electric power and mass communications. Two charismatic masterminds, Kenneth Lay and Jeff Skilling, ran Enron and were regularly lionized by the press for their skill and daring. Enron stock was the darling of Wall Street, and it seemed to defy gravity by rising steadily into the stratosphere.

Like most major companies, Enron had established a 401(k) retirement plan for its employees, offering a range of options for the regular savings contributions that would be automatically deducted in each pay period. One of the investment options in the plan was to put those contributions into Enron stock. The chief executive officer, Ken Lay, strongly recommended that employees use Enron stock as their preferred retirement vehicle. Enron was likened to Elvis Presley revolutionizing the music scene. The old power companies were like old fogies dancing to the music of Lawrence Welk. And so the secretary put all of her retirement savings into Enron stock, and how glad she was that she did. As the stock soared, while she had never earned more than a modest secretary's pay, her retirement kitty was worth almost $3 million. During the next year, she looked forward to retirement and a ...