401(k) investors: Follow the 5% rule to protect your retirement savings

In my 44 years advising investors, some key questions keep popping up. They go like this: “I hold a lot of Company X. What do you think of it? Should I keep it?”

My opinion isn’t relevant. But here’s what is: If you hold more than 5% of your total portfolio value in any one stock, it's too much. Trim it, regardless of anyone’s views, even your own or mine.

Traditional investing wisdom often isn’t wise. But this tidbit is: Diversify. Spread your assets over many companies and holdings. Don’t overload your 401(k) with your employer’s stock, for instance, even if they offer cheap stock options.

The only valid exception is if you (or you and a few partners) control the firm and aim to bet the farm to become a zillionaire. Then maybe it’s valid. And then, you won’t want or need anyone’s opinion. But heed this advice: Those structured to hit big or go home overwhelmingly go home.

Too many folks own a few scattered holdings and one whopper. Sometimes 25 percent, 35 percent, even half their liquid assets. Crazy! Even the best firms can go haywire. Maybe their sector falls from favor, like tech in 2000 or energy recently. Maybe management screws up. A disruptive competitor arises. New governmental regulations wreck everything.

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If one of those dark scenarios happens but you followed my 5 percent rule, achieving your retirement goals will remain fully feasible, even if some of your stocks implode. But if 35 percent of your assets are in one affected stock or firm, those goals may slip out of reach. Remember those Enron employees’ 401(k)s that were 100 percent Enron? All they got from it was depression.

There always are exceptions. If you have restricted stock from your employer and aren’t allowed to sell, then concentration may inevitably result. But plan now for when you can sell. When that time comes, don’t hesitate.

Until you reduce your exposure to 5 percent of assets, sell all you can as soon as you can. If you have a large position with big embedded capital gains – which could complicate taxes – a more gradual plan to sell down can make sense.

But in my view, you should first consider the actual impact of those gains and what may happen. After all, if the stock craters before selling, you may not have gains to fret over later. I’ve seen a lot of losses created by folks trying to avoid taxes.

Often, neither taxes nor restrictions drive concentration. Sometimes people just can’t bring themselves to sell if they have an emotional connection to their former employer, a firm a family member founded, shares inherited from loved ones, a universally popular stock ... or just a stock they love for some eclectic reason. 

While such ties are human and understandable, retirement investments are your real business. And selling is a business decision, not a personal relationship. Don’t let your emotions get in the way of prudence. Hard to let go? Then note this: No one said you couldn’t hold on to some – the important thing is limiting, not eliminating.

Often, fear of missing out is the concentration culprit. “FOMO” makes investors reluctant to sell. They think: What if it’s that golden ticket to riches? Could happen!

But never forget all the legendary “couldn’t miss,” “super-safe,” golden tickets of yesteryear – firms that epitomized long-term greatness and dominance and then morphed to rust: Avon (America’s 13th largest stock 50 years ago) or Borders Books, Eastman Kodak, Polaroid, Sears, U.S. Steel, Xerox, Zenith.

Retirement investing isn’t a get-rich-quick scheme. It’s about getting solid but volatile stock market-like returns gradually without too much risk. If you want to get on the Forbes 400 list, start a bet-big firm. If you want to invest for retirement, diversify.

Sell that oversize stock, eliminate the concentration and don’t look back. Don’t fret where that firm is heading, what its prospects are or how high it may soar. You’ll be happier and likely richer in your old age.

Ken Fisher is the founder and executive chairman of Fisher Investments, author of 11 books, four of which were "New York Times" bestsellers, and is No. 200 on the Forbes 400 list of richest Americans. Follow him on Twitter @KennethLFisher

The views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY.