401k: Don't Put All Your Eggs In One Basket

A 401k is a retirement savings plan. It is funded by employee payroll deductions and, occasionally, employer matching contributions. The money is put in a fund and invested. Some employees opt for low-risk investments, such as short-term bonds. On the other hand, others play the gambling game and dabble in the stock market. Which should you choose? Both.

On December 11, 2008, it was learned that well-known stock market expert and financial expert Bernard Madoff wasn't an expert investor after all. What was he? The mastermind and operator of a giant scheme. Individuals and companies invested money into his firm. They did so believing they were making a wise investment. Most are still reeling from what came next. It was all a scam. He was using new money from new “investors,” to payoff the old. Since those who drew money off old investments actually got paid, there were little signs this was nothing more than a scam.

Those of us not affected by the Bernard Madoff swindle often just wonder how this could happen and then think about the people who lost money. Some had their entire retirement savings wiped clean. Those who wanted to retire in 5 years, now don't have enough money. Worse yet, those who are already retired and continue to draw money have no more money left. Yes, it is normal to show compassion for those impacted and wonder how this could happen, but it is best to look at the situation from a lesson learned. Those who had their entire retirement savings wiped out made a costly mistake. That mistake was not investing in a scammer, as even the “experts,” were none the wiser. The mistake was putting all their eggs in one basket.

Not everyone lost their entire retirement savings due to Bernard Madoff. Some just lost a percentage. Any money lost is devastating, but at least those who spread out their investments have some money to fall back on. This is the lesson. Never risk everything on one endeavor. As stated above, you should opt for a combination of risky stocks and low-risk bonds. If one venture suffers, you still have the other to fall back on.

Returning back to stocks and the Bernard Madoff scheme, do more than just diversify your stocks. That is one note many victims made. They invested money through this individual, but they diversified. One couple interviewed on television believed they had stocks in Hewlett-Packard (HPQ), McDonald's Corp (MCD), and many others. Yes, the stocks were diversified, but they only invested through Madoff. This is another example of not putting your eggs in one basket. You may not have control over which brokerage and money management firms your 401k goes to, but keep this in mind for personal use. Do not rely on one person or company to carry you through retirement.

Another lessen learned is the importance of good old savings. You should have a 401k plan. If your employer offers a plan, you are making a mistake not to take part. In fact, that mistake can cost you money. Many employers match contributions made by employees. This translates into free retirement money. Do not pass this up. With that said, stash away money when you can. If you are debt-free create a plan. Plan to deposit $100 in your savings about for every $1,000 or so you contribute to your 401k. It will add up over time. Do not use this money unless in dire circumstances. This can also help to carry you through retirement, especially in the event your investments sour.

It is a terrible phrase to use, but out of tragedy their always comes a lesson. Thousands of Americans have lost their hard-earned retirement savings. Those who put their eggs in one basket are reeling from the effects and will be for the rest of their lives. If you weren't affected by the Bernard Madoff scheme, take this unfortunate situation and use it as a lessen. Do not rely on one individual, one company, or one investment, no matter how solid they appear.