We have all heard the stories about people who took their entire life savings and invested it in an unusual opportunity that everyone around them thought was a high-risk gamble. Inevitably, through a combination of hard work, determination, and perhaps pure dumb luck the investment paid off. But in fact most people who take such chances often do so to their own regret. And you may not even realize you are doing that until it’s too late.
Take the employees of Enron, for example. Enron was involved in a quirky form of energy contract trading. They helped broker electricity contracts between the various local power companies. Enron’s model of trading in energy was based in large part on moving into markets where regulations were a little unclear and executing deals that generated revenue.
As most people now know, all that came a sad end when Enron’s accounting practices were questioned. The company had inflated its revenues and kept two sets of books. Instead of making a lot of money they were really in the business of losing money. The company collapsed and their failure also took down the Arthur Andersen consulting firm, who had been Enron’s corporate auditor.
But along with Enron’s leadership and Arthur Andersen’s investors, virtually of Enron’s employees were wiped out financially because they had purchased company stock in their retirement plans. When the company stock was trading well the employees had great portfolios; as soon as Enron’s stock price fell through the floor (and certainly after the company was delisted) those employees were in many cases left with nothing for their retirement.
Enron employees lost their jobs, their health care, and their savings because of the company’s failure. Enron’s retirement fund rules were very restrictive. Had those employees been permitted to invest in a normal retirement plan, where their money would have gone toward mutual funds and money market accounts — and where they could withdraw it at need — they at least would have been able to exit with something.
Enron is an extreme example of putting all your investment eggs into one basket, but it’s not the only one. Many of the people who invested with Bernard Madoff lost everything, their entire life’s savings, because they invested it all with a single firm: Bernard L. Madoff Investment Securities LLC. That is a hard, bitter pill to swallow when you’re a small business person or a working-class employee.
Personal investment portfolios should be diverse enough to survive most major shocks, but not so diverse as to be difficult to manage. Even on a modest income, if you establish a budget where you spend less than you earn, you can adjust your lifestyle so that you have several investment strategies:
- A 401(k) or similar plan at work
- A personal savings account (for emergencies)
- A Whole or Universal Life policy (to protect your family from unexpected loss)
- An independent investment portfolio
You don’t need to become a day trader or even actively trade. Just dropping a few hundred dollars a year into a major index mutual fund and leaving your money alone will help you diversify your investments. You can do that through an IRA or through an over-the-counter (or online) trading account. You don’t have to be wealthy to invest in stocks and bonds. You can even invest directly in savings bonds, which are a protective (conservative) investment strategy.
Personal investment strategies don’t have to be complicated but they should be diverse. But to answer the main question more directly, should you take everything you have saved up in a single opportunity, I think that comes down to the opportunity. If you want to start your own business and you know enough about how that business works, then this is probably a good single-investment option provided you perform due diligence. You need to know how many new businesses in your proposed field fail and why, and you need a business plan that maps a path toward success for you.
If, on the other hand, you have a friend who has an investment adviser who is turning double-digit returns on investor contributions, this writer’s advice to you is to not be the next victim of a Ponzi scheme. If it sounds too good to be true, it probably is.