Please note: the following post is a guest post.

No matter what stage of life you are currently in you can also be preparing for your retirement. The time will come when your work will be done and you will be able to have more freedom to pursue the passions that you enjoy. However, the amount of money that you save for retirement will dictate how much money you have to put towards living expenses, hobbies and travel.

Just the thought of needing that much money might send you right out to look for loans at moneysupermarket but you don’t need a loan just yet. Consider all the ways that you can save and plan ahead during different stages of your life. When you first join the work force you may not be hinking about retirement. Growing old seems so far away and you live for the moment, especially in your youth. However, this is the best time to start saving for your retirement.

No matter where you work or how many hours you work, check to see if your job offers any type of 401K or 403b program. You can start by just putting in a percent or two each paycheck. You will barely notice that the money isn’t there and in the end, it will work in your favor during tax time.

As you establish a career, your employer is more likely to offer matching incentives for your retirement savings.  If you have a 401K or 403b and you are putting money away, good for you! Once you find a career and settle into a company, look to see if your employer will match any of your contributions up to a certain percentage. If they do, make sure that you are putting in at least that percentage, if not more.  If your employer matches up to 2% and you are putting in 2%, it means that 4% is actually being tucked away for you to use when retirement rolls around.  Don’t be discouraged if the amounts look small. At this point in your life, even a small amount of money, when interest is accrued, will turn into something considerable in the future.

The younger you are the more risks you can take when it comes to investing the money in your 401K or 403b. Speak with a representative to learn about the specifics that you are investing in. This is also a great time to open up an IRA or Roth IRA. Here, you can also tuck away money meant for retirement. The options include taking a tax break now and paying when the money is removed or paying taxes on it now. Either way, the money is set aside specifically for retirement.

Throughout your life, continue to work towards the goal of being debt free. You want to pay everything off so that you don’t need to continue to make those payments while you are on a retirement budget. Some people even set the goal of paying off their mortgage, as that is one of the biggest expenses a retired person can have.

Don’t forget to keep a savings account. While you are only earning the minimum amount of interest, it is still a good idea to have some money tucked away in a savings account with no requirement about when you can take it out and how old you have to be to gain access to it.

Remember that for many people looking to retire in years to come, there is no guarantee about Social Security. If you don’t count on that check every month, you will be more aggressive in your savings and be pleasantly surprised if it all works out.

We all want to be able to have enough money for retirement.  Many people are not on track to do so, which makes it paramount to understand what actually helps us get enough money for our older days!

A recent article from Smart Money listed three factors that are drivers of retirement success. Here they are, and I’ll follow with my comments.

1. Employing a consistent, long-term savings and investing strategy
2. Working with a financial adviser
3. Saving money in your workplace retirement plan

Here are my thoughts:

1. I absolutely agree with this.  Being disciplined with our savings efforts, and doing in regularly over a long period of time, can do wonders for one’s retirement. It’s really straightforward in principle: save, do it regularly, do it early in life, get a solid rate of return, and let compounding work it’s magic.  Now, there’s more to it, such as protecting cash inflow, managing one’s career, and diversifying income streams.  In any event, regularly saving and investing consistently over a long period of time is a great practice.
2. Hmmm. I  manage my investments on my own.  Would it help to have an adviser? Apparently, according to the article, it would.  They show that people who have an adviser have a higher probability of replacing income in retirement than do those without an adviser.  With me, it’s kind of a control factor, wanting to make the decisions on my finances individually. I’m not into sharing these decisions:) Plus, admittedly, there could be some hubris involved. Beyond that, however, I just feel safer managing my own money. Maybe this is something I should revisit, in terms of considering a financial planner.
3. Yes, I agree with them on saving in a workplace retirement plan.  When you do so, it can often become automatic. This aligns well with #1 above. Plus, when you consider that some employers offer a 401k match, it becomes an even more attractive option. Just don’t use that 401k for credit card debt, needless to say!

As you can see, the one area for which I’m not totally on board is the adviser factor. I’d like to learn more about the study that yielded the findings quoted in the article, just for my own curiosity so I could better interpret the data.   Who knows, I might be able to be convinced to revisit this one.

Also, their recommendation to save at least 10% is good, but I would suggest higher. To be fair, they did say “at least”.

Anyway, I’m all in on #1 and #3, and skeptical on tip #2.

My Questions for You:

What do you think about these tips? Any more that you would add?

Considering my own thoughts on advisers, I’m curious what yours are. Do you have one? Are you considering one? Feel free to convince me on your views:)

When it comes to your future retirement prospects, what feelings come to mind? Positive feelings about expected financial independence, or pessimistic worrying about financial hardship?

Your answer just might depend on where you are, geographically. From a global perspective, many of us in the West tend to have a different view from those in major countries in the East.  A short article on the Smart Money site summarizes the differences between prevailing Western and Eastern views on retirement. The article references a survey that was done about retirement and financial planning, and was fielded in 17 countries.   

The key findings are that in North America and Europe, people tend to be a more pessimistic about retirement – with many people believing that their own retirement will not be as good as that of their parents.  Conversely, in Asia’s newly strong economies, people are more optimistic about having a retirement that will be better than their parents (69% in India and 62% in China, for example).

The phrase that really jumped at me about the Western view was that for people between 30 to 60, it’s generally viewed that parents are experiencing “a golden age of retirement which will not be repeated ”.

My interpretation is that Westerners see standard of living declining, and Easterners see standard of living increasing – which manifests itself in different views of retirement prospects.

Personally, I like to be positive about things in general. We might not be able to choose our circumstances in an instant, but we can choose our attitude. Easier said that done sometimes, but optimism and hope – coupled with hard work – can bring great things! All this said, I have to admit that what I anecdotally hear is mostly concern as opposed to optimism here in the U.S.. In terms of the economy, jobs, saving for retirement, college expenses, etc – it’s mostly concern as instead of a confident, upbeat outlook.  Frankly, in this case I feel much of the concern is justified.

I’m bursting with nationalistic pride, and want my country to get back to being the true economic superpower that it once was.  Some might disagree, but I still think that long-term this is possible. Even today, our country is a place that many people are eager to come to and make money. Capitalism is a great system.

Thing is, for all of our accomplishments, we just don’t have a culture of saving money. We’ve been spenders, as evidenced by the staggering national debt. Why should we have ever gone into debt as a nation, much less have trouble paying the interest on that debt? This shows up in our personal savings rates. The article quotes China as having a 38% rate, India 35% (of GDP). The U.S.? We’re at 4%.   An prior post of mine highlighted how so few people could cover a sudden, unexpected $2,000 expense – another indication of lack of savings.

Having said all this, I know that we’re still quite lucky to be here, and still do have a very good quality of life overall. But things sure don’t seem as easy for people as they might have been a generation ago. Hopefully, out of these economic conditions of recent years, the awareness of our culture of debt will be raised to the point where we as a nation expect responsible decisions made. I know I’m doing what I can to save and live within our means, and I’ll bet you are too.

My Questions for You:

What are your thoughts about your retirement prospects -are your thoughts more optimistic these days, or affected by fear of potential hardship?

Do you feel that our retirement prospects (for those of us of working age) don’t match up to the quality of retirement of a generation ago? Or, do you share the positive view that’s more commonly held in developing Eastern nations.

It would also be interesting to discuss ideas for what we can do to improve our collective situation.

The following is a guest post by Jane Sanders from debtmanagement.net. Visit her site for tips on managing credit card debt.

So you just got new job or promotion with a fat, shiny paycheck? How should you allocate your riches? According to most financial experts (and any fiscally sensible saver), you should maximize your contributions to a 401K. They recommend this because, even if your company does not offer a matching amount, this strategy provides a fairly simple way to automate your savings while also lowering the amount you pay in taxes.

Despite these advantages, there are many who neglect the advice. To understand why maxing a 401K is a good thing, the negative aspects must be understood first. One of the major reasons a 401K is not funded to the maximum that people shy away from having such a great deal of money tied up in long term (very long term) investments.

Usually, the maximum allowable amount is a high percentage of your gross income (as much as 30-40 percent), and, for those just entering the work force, this is a lot to let go. To overcome this, make a budget of your necessary expenses, and you’ll see that there is probably enough left over.

Another reason why some shy away from maxing out is that there is sometimes only one open enrollment period. This means that once they’re in the plan, they cannot back out, and the money being taken out of the individual’s paycheck every month is put away whether they need the money that month or not. This can be overcome by creating an short-term or medium-term emergency fund that can be drawn from in times of need.

Now that we’ve dealt with the negatives, what are the positives? Saving for retirement in a 401K creates periodic, enforced savings. The money you put away is being backed by the federal government, meaning there will be money available when it is time for retirement.

Another major advantage for maxing out a 401K is the resulting decrease in federal income tax. Generally about 25-30 percent of your paycheck is taken from your gross income and paid toward your federal income taxes. Money contributed to your 401K is taken out before income takes, so the full of value of this portion of your paycheck can earn investment interest.

Having money in a 401K also opens up options for future investment strategies. Once money has adequately matured in the 401K, it can be used to buy stock, invest in money markets, or find other long term investment opportunities. This money should be grown in safe, steady investments so that will be waiting when you’re ready to retire.

Deciding whether or not to max a 401K can be a difficult choice, especially if you are just entering the workforce. Though costs may be high in current economic times, planning for the future is always the right thing to do. Maxing out your 401K is the best way to get the most out from your paycheck in a safe and legal way.

Editor’s Question: Readers, what do you think about the guest poster’s premise that maxing out your 401(k) is the best thing you can do with your paycheck?

The Financially Savvy Centenarian

I recently saw an article on Yahoo! Finance about a 107-year old man who was apparently still financially self sufficient. In this day and age where some people are worried about outliving their money, this centenarian has survived on his savings.

What’s interesting is that article mentions that he never made more than $10,000 per year. Granted, that sum would have meant a lot more when the man was much younger, due to the time value of money. Nevertheless, he clearly wasn’t Trump-esque in his income. This was a regular guy.

Given that he had obviously been smart with his money, he was asked for his advice on retirement planning. According to the article, here’s what he suggested:

1. Thrift
2. Real Estate Investments
3. Use Debt Well
4. Work even when jobs are hard to find
5. Save and invest conservatively
6. Stay Healthy

I totally agree with 1, 3, 4, and 6. I partially agree with 2 and 5.

Let’s jump ahead to #5. Why only partially agree? Well, I TOTALLY agree with the save part. It’s the invest conservatively part that seems to perhaps not fit these days? By that I mean that the man did not invest in the stock market at all. I wonder how much more he could have made if he did invest in the market.

Back to tip #2. I do agree that real estate has made people a lot of money over the years, and is better over the long-term than renting. But one has to be careful, as we have seen lately. Outside of one’s own home, I’ll give real estate investing a partially agree. It can be great in the right circumstances, but isn’t for everyone.

I especially like #6 – Stay Healthy. I had this high up on my list of key success factors for financial health. Hard to make money when you can’t earn income, and hard to save when you’re spending a lot on health care costs!

Of course, even though I have my thoughts above, I have to hand it to the man. And let’s be real here: who are we to argue with a guy who’s A) lived to 107 and B) is still able to live on his savings!

What do you think about these tips?

Do you agree with all, or just with some? Is it good to pause to consider any reservations with these tips in light of this remarkable man’s proven success?

Blog Carnivals

This week, Squirrelers was included in several carnivals:

• Stock Returns by Month: Interesting Historical Trends was included in the Carnival of Personal Finance, at Taking Charge
• My Best Customer Service Experience Ever was included in the Carnival of Money Stories and selected as an MVP (Editor’s Pick) at Sweating the Big Stuff

Recommended Reading

Here are some articles from the personal finance blogoshphere that caught my eye :

• Knowledge is Power, and its Free Too!, at Wealth Informatics
• Book Review and Giveaway: Debt Free for Life by David Bach, at Financial Samurai
• How Important is Financial Balance to You?, at Invest It Wisely 
• Watch Out for this Hidden Fee when Deciding on a Broker, at Money Cone
• Tax Savings on OTC Medications with Flexible Spending Accounts,  at The Digerati Life
• Don’t Be So Concerned About Money that you Miss Life, at PF Firewall
• 10 Tips to Save Money, at Budgeting in the Fun Stuff
• When a Deal Isn’t So Great, at Personal Finance by the Book
• Trading One Vice For Another, But in a Good Way, at Everyday Tips and Thoughts
• Can Work Procrastination be a Symptom of a Larger Problem?, at Canadian Personal Finance
• TFB Monthly Income Report, at The Financial Blogger
• Career Tip#2 – Be Polite, at 101 Centavos

Those of us who are personal finance bloggers or blog readers know that it doesn’t necessarily take remarkable luck and good fortune for someone to eventually become a millionaire. Sure, those things are a tremendous help, there is no question about that. However, an individual or family with a more modest level of income and not coming from wealth still has a chance to get there, provided they start saving early enough.

Yahoo! Finance had an article on 7 common millionaire myths that are commonly held. Below are those myths, with my comments:

1) Millionaires Don’t Pay Their Taxes.

As the article states, they already do, and this is not likely to change in the near term. While we all want to be millionaires, there’s no need to hate on those who are, just because they’re millionaires!

2) Millionaires Just Inherited Their Money

Some sure have, but the viewpoint that all have inherited big money is simply not true. Many of them have worked hard for their money. I think that this myth is one that’s perpetuated in order to make people feel better about their own situations. Believe me, I’m no millionaire but I’m not going to stick my head in the sand and think that all millionaires just had the money handed to them. Some did, but not all. Sometimes that’s evident.

3) Millionaires Feel Rich

I’m not a millionaire, so I can’t tell you exactly how they feel. It would be nice to find out from personal experience someday! That said, from what I have seen, I suspect it’s the drive to cover life’s necessary expenses, and a bit of ”paranoia” about being broke, that has driven people to get to the point of being wealthy.  

4) Millionaires All Have High-Paying Jobs

No, they don’t. Some people are able to live within their means, maximize the savings minus expense gap,invest properly, and avoid big financial and life mistakes. With a mixture of discipline (and in some cases a little luck), there have been innumerable middle-class people who have accumulated wealth.

5) Millionaires All Drive Fancy Cars

Many people became millionaires by living within their means, and being able to discern wants and needs. If I had a million dollars handed to me today, I still wouldn’t buy a new, upscale branded car. Rather, I would buy a reliable used car.

6) Millionaires Hang Around the Golf Course All Day

If they did this, they had better be worth well more than a million dollars! Otherwise, their millionaire status would be gone in a hurry. This myth is a bit strange.

7) Millionaires are Elitists

Some may be, and I’m sure many are out there. I have also seen a few that are outwardly just like the average person, but behind the scenes when you get to know them their hidden snobbery comes out. Also, I have seen a few that are not elitists and frankly, don’t want to spend any money at all if they could help it. I think it’s tough to generalize about the attitudes of millionaires.

What do you think of this list?

I think there is much wisdom to be gained from those that are. Having a mentor, role model, or millionaire teacher are ways to get help and wisdom. In order to absorb that wisdom, I believe one must cut out biases, perceptions, and jealousies, and focus instead on embracing reality.

I also think that some people who want to be wealthy try to act like they’re already there. You know, driving a car that’s really a step or two above what they should be driving, buying a home that’ s not a good fit based on their income and savings, or purchasing designer clothes despite not saving much money.

A buddy of mine who is in his mid-30′s and dating shared with me a story about a woman he went out with who told him about her vacation preferences. She said that when traveling, she preferred to stay in 5-star resorts and get pampered as that was her standard. She just wouldn’t stay in someplace lesser. His take was that this was a huge red flag, and the relationship never got started. Clearly, to him, she was someone with very high tastes that was living well beyond her means. He’s not stingy at all, by the way. He’s a good guy that would be generous to anyone he is with (in case you’re reading, my friend!).

Anyway, I think that outside of those who inherited or got extremely lucky in some way, many people who are millionaires got there because of hard work. In addition, they got there by living within their means, saving a significant percentage of their income, making smart health choices (such as deciding to stop smoking), and being responsible overall in their lives. For example, making smart decisions such as saving enough money in tax-deferred accounts, and only making an IRA withdrawal when the rules are clear. Furthermore, these aren’t necessarily extraordinary income earners, either.

What do you think? Do you agree that these are generally myths? Do you have any examples from your own life to prove or disprove these assertions?

This article was included in the Carnival of Personal Finance at Budgeting in the Fun Stuff

I have always thought of emergency funds as a vital part of one’s finances.  You want to be able to pay the bills in the event of a loss of income or revenue stream, when your expenses exceed whatever you have.  One thing you don’t want to do is lose money, as it’s harder to make up losses than might meet the eye.

Having said that, I always thought about emergency funds in the context of a person or family relying on income from current employment – not someone who is in the retirement phase of life.  An article at Yahoo! Finance brought up this topic, and it piqued my interest in considering why one would need emergency funds when retired.

The key reasons given were:

1. Unanticipated expenses
2. Inflation
3. Market Fluctuation

Now, after reading this article, I have revisited my thinking on emergency funds at different times of life. For me, an emergency fund for a working person is to make sure that person and his or her family would be covered in the event of job loss or other disruption in income stream. Even if such people have money specifically allocated for retirement, it can be kept separate from funds designated as for emergencies. In terms of amount, I think that 12 months is a good number, rather than the six month figure mentioned in the article. People out of work can remain out of work for a long time these days.

For those truly retired, there is no reason to worry about job loss. They are retired! To my way of thinking, retired means that you are done working; if you do work, it’s not for income that you are actually counting on. If that were the case, you would not be retired. Additionally, in terms of income streams in retirement, one probably doesn’t want to take on risk in terms of potential variability anyway. Social Security or Pensions don’t necessarily add a variable component.

In terms of the unanticipated expenses, inflation, and market fluctuation – shouldn’t these be taken into account when planning for retirement anyway? Sure, a larger percentage of assets for retirees will likely be in lower risk vehicles such as cash. So why should additional cash or liquid cash equivalents be deemed to be part of an “emergency fund”?

Again, I think it’s just a matter of asset allocation in a retirement portfolio, which should ideally be set up to provide for retirement needs while taking into account such circumstances as noted in the article.

Bottom line: I think that “emergency funds” are necessary for people who haven’t yet reached retirement, but are not a specific, stand-alone entity in retirement.

I realize than many people may see it differently. What do you think?

As we manage our investments, many of us allocate our money across different classes: stocks, bonds, real estate, cash, and so on. Within stocks, many of us have different strategies. Some stick to index funds, some like individual stocks, some like a hybrid approach. We are all different.

But here’s a question for you: when you invest in stocks, do you first think of companies in your home country? For example, if you’re in the U.S., do you think of U.S.-based companies as the basis of your equity investments? 

According to this interesting piece on Kiplinger.com, you may be guilty of home-country bias. This is where people tend to invest more in their home country stocks than they should based on percentages. For example, the article states that the  U.S. owns 43% of the world’s stock market value, but U.S. investors hold 70% of stocks in American companies.

Interestingly, the are more glaring examples given. Japan holds about 10% of the worlds’ stock value, but Japanese investors focus 63% of their stock investments on home country companies. An even more extreme example from the past: in the 1980′s Sweden accounted for less than 1% of the world’s stock value, but Swedish investors – according to the article - were 100% invested in home country stocks.

To me, this is another example of people focusing too much on what they know, feeling safer about that than what they think they don’t know. This concept extends beyond the realm of domestic vs. international stocks, all the way to people investing in their employer’s stocks vs. other stocks because it’s the home team.

I have clearly seen this phenomenon in action, in one particular case from years ago, where I heard someone announce to a large gathering of coworkers at his retirement party, that he invested 100% in the company and that he recommends that we all do the same. I couldn’t believe my ears – not only by the words he said, but also by the ovation he received from much of the attendees.

Whether it’s your own employer, it’s industry, or your even home country - it’s smart to watch out for this familiarity bias. 

As for myself, I have employed an index-based strategy for the most part, so I’m not showing a familiarity bias in terms of companies or industries that I personally know better. That said, I have to say that after looking at the figure above referencing the U.S. holding 43% of world stock value, I have to say that I too have shown a home country bias. I have been down in the 10% range, in terms of percentage of stocks that are international. To me, this has been something I thought about as a way to have some diversification, but I still thought of U.S. stocks as the obvious foundation of my stock investments.

As I think about this more, it may time for a paradigm shift for me. This might mean thinking globally first while leaning toward home country stocks out of loyalty, vs. what I have been doing, which is thinking U.S. stocks first and foremost with international stocks just as a token part of my investments.

What do you think? Do you have a home country bias with your investments?

There are many ways that we measure wealth, and many ways that we can fund our retirement through our wealth.

One way to measure to determine where we are in terms of our savings is to look at months of covered expenses. For example, if a couple had $600,000 in net worth (assets minus liabilities), and $4,000 in monthly expenses, then they are 150 months wealthy in terms of savings.

Covered expenses is a simple, practical way for many of us to assess where we are financially. I’m a big fan of this personal finance diagnostic tool. It tells us how long we can live on what we have saved. Most of us are not multi-millionaires who can live off interest income and not touch our principal. Some folks reading this might be in that position, but if the rest of us stopped working, we would have to use our savings. This approach tells us how long our savings will last.

Stretching our minds and looking at things differently, perhaps we can save money with the intent of accumulating year in, year out, and never spending your savings. Keep on saving it, even when your months of covered expenses exceed your estimated remaining lifespan.

Why? Well, not touching savings is not just letting money sit there. Rather, it’s repurposing the money to be used as a source of more money.

This is where portfolio income comes into play. Instead of consuming your savings, you preserve your savings and let your money work for you. It becomes your faithful source of your own personal social security check.

Lets say the couple with $600,000 wants to live off an income stream without touching the principal. One could look at the required rate of return to see how how hard this money needs to work in order to satisfy their expense needs.

Taking a conservative view of returns, however, one could try to backsolve for the required nest egg size they would need to accumulate in order to live on their income stream.

For example, if the couple wanted to live on $4,000 monthly – $48,000 annually – they would have to amass quite a nest egg. If you took $48,000 and assumed a 3% rate of return to match inflation, it would take a next egg of $1.6 million for them to live on that $4,000. If they reduced their expense needs to $3,000 per month, it would take a nest egg of $1.2 million for them to accomplish the same goal.

This specific example doesn’t factor in the idea that your principal will reduce in purchasing power every year due to inflation. Remember that a dollar today is worth more than a dollar tomorrow. That said, portfolio income is cash flow that you can rely on without directly touching the principal. The good thing is, if you need that, you can eventually tap that as well. It’s another layer of conservatism is making sure you have enough to live on.

Ultimately, my take is that by working toward portfolio income, while trying to leave the principal intact as much as possible, you’re taking a big step toward financial freedom.

You will have worked hard to save and grow your money. Allow it to reciprocate and work hard for you in return!

Any thoughts? Do you look at retirement savings in terms of income streams, or in terms of a lump sum to tap into?

One note: I am personally a long, long way from retirement. Not going to stop me from dreaming big though:)

This article was included in Carnival of Personal Finance #264 at My Journey to Millions

Earlier in my career, I attended a big going away celebration for someone who was an executive at the company for which I worked at the time. I had just joined the company, and didn’t know this gentleman or his history at the company. Yet, I went to this event along with most in my department and several other closely related departments.

I can remember the scene – it was in a large auditorium-style meeting room, and there were probably at least 200 or so people in the room. The guest of honor, who was retiring, gave a speech where he recalled his proudest accomplishments at the company, shared lessons he learned along the way, thanked people who helped him achieve his success, and told a few short, funny stories. It was clear that people liked him, and that he was respected, judging by the reaction of the attendees.

Toward the end of the meeting, the guy got serious and said that he was going to share his best advice for all of us, based on his experience, that would most benefit each of us personally.  The room got a bit quiet – funny how that’s the case, when the notion of individual benefits is mentioned:) Then, he told us that his best move for his family was the confidence he had in his employer, and his loyalty to it. And how did he show that? He proudly proclaimed that he took his personal investments and put it directly in the company stock. Not just some – but ALL. Yes, he invested everything he saved from his job in his company stock. He proudly, emphatically recommended that all of us do the same, and that along with our hard work will give us the same type of rewards.

Instantly, almost as if on cue, the majority of the people rose up and gave him an ovation. Heads were nodding up and down, and he was clearly seen as the loyal, good soldier who made out well. That latter part may have been the case, but not all of us gave him an ovation. Some of us – including myself and the lady next to me – were stunned and just sat there shaking our heads.

Now, I was of course happy to see someone successfully ride off into the sunset amid great fanfare and financial success. Good for him. But his advice to the crowd was flat out wrong.

He suggested putting all your eggs in one basket – the one you know best and are most closely tied to. To him, his actions were smart and honorable. To me, his actions were well-intentioned, but naive and lucky. Very Lucky.

The stock performed well over the years, increasing significantly over the time he worked there and would have made his investments. So I can see how he feels like he hit a home run – because he probably did, and I’m guessing it went way out of the park! That said, what if he took the same approach, out of loyalty, to a different employer. Let’s say that company’s stock ended up tanking. Anyone remember Enron? There were plenty of people whose personal finances were just torched by that episode. 

It just doesn’t make sense to tie up a large percentage - let alone all – of one’s equity investment in one stock, out of loyalty or otherwise. Additionally, when that company also happens to be your employer, you are taking an even riskier strategy, as even more of your personal situation is directly tied to one investment.

I see how the logic could be appealing – invest in something you know very well, as opposed to investing in a wide variety of companies of which you know very little.  Knowledge is better than no knowledge, it should seem.

In the case of your the equity portion of your portfolio, however, don’t invest it all in what you do know very well – your long-time employer – but invest in a diverse portfolio of companies. Index funds fit this strategy very well. Yes, I’m saying choose what you don’t know as opposed to what you do know!

Putting it all in what you know, to those that do it, seems safe. In reality, it’s a tremendous risk, in my opinion.

What’s your take? Do you feel safer by diversifying through investing in companies you may not know (index funds), or by focusing on a company that you know extremely well (employer or former employer)?

This article was included in Carnival of Personal Finance #261 at Pop Economics