Enron has often been used as a primary example of why such diversification is important. Many Enron employees had 100 percent allocations to company stock in their defined contribution plans (at the end of 2000, 62 percent of the value of employee 401(k) plans were held in Enron stock) and were financially crushed when the company’s fraudulent practices and dreadful leadership were brought to light as the company went belly up in 2001.
But the potential for fraud and bad management are not the only reasons to diversify. Sometimes good ideas – even great ideas – end up not working out desite the best of intentions and diligent effort. An investment that seems to have all the necessary elements of success can fail and fail miserably. I’ll try to make my case in this regard by using some terrific rock and roll from my high school days.