The Right Way to Look at Risk and Reward
Last week, Felix Salmon commented on a story that appeared on WSJ about a GM bondholder. He makes a very keen observation on risk and reward in that post.
If you invest a large chunk of your 401(k) in the stock of just one company, your actions are fraught with peril. If that stock performs badly — which is always possible — then you could end up with a significantly diminished standard of living in retirement. But at least there’s a possible upside: if the stock does spectacularly well, you can end up in clover.
By contrast, there’s no reason whatsoever to invest a large chunk of your 401(k) in the bonds of just one company. You still have the same downside — the company can default on its debt — but there’s no upside at all: the best-case scenario is just that you muddle through getting your coupon payments until the bonds mature.
Putting everything into one company (if you don’t know what you’re doing) is indeed a risky venture and especially if it your retirement money you are playing with.
I see a lot of people talking about odds and say that there is a very low chance of that company winding so it doesn’t matter. Sure, there is a very slim change, but what if it happens? All your savings will be gone. Its not the same thing when you have all your eggs in one basket.
The only way that GM will survive is through government support and I agree… the money one had invested would be gone.