Jim Cramer’s Mad Money on CNBC has an “Am I Diversified” segment every week during which he rates the callers’ portfolios according to the level of diversification. Not having all eggs in one basket is important for any kind of investing, said Jim Cramer, but it is particularly important when investing for retirement, because that is the situation investors might be tempted to rely heavily on one stock or one sector.
As many personal finance gurus suggest, people in their 20s should start saving money, and IRAs are essential. “This is not a bold insight, ” said Cramer. However, when it comes to 401 (k)s, many investors make a common mistake of buying heavily the stock of the company they work for. Perhaps there are special incentives or they feel they know the company, have their eyes on it, and can make informed decisions. Cramer says buying some of this stock is fine, but it can justify being on automatic pilot. He recalls how Enron employees argued against his urging them to diversify, and when Enron collapsed, their retirement funds went up in smoke.
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Even though some sectors might be tempting, no one sector should comprise an inordinate amount in a portfolio. Those who beefed up their tech holdings excessively got crushed during the dot.com crisis. Until 2013, high dividend stocks seemed the place to concentrate on, but when interest rates on bonds rose and gave high yielders a run for their money, this sector plummeted (yes, high yield is a sector).
Diversification is always important, but with essential money like retirement, it can’t be emphasized enough.