Many investors have a huge percentage of their 401k money in employer stock. On the surface, this doesn’t seem like such a bad idea because you are investing in a company that you know a lot about and have faith in. Countless times investors have justified concentrations in their company’s stock with the maxim, “Put your eggs in one basket…and watch that basket!” But the reality is that even the bluest of the blue chips can give employee stockholders the blues if they take a bit hit in their share prices. British Petroleum, Citigroup, Pfizer and General Electric have all had difficulties the last few years that have devastated their share prices (not to mention Enron!) and profoundly impacted the retirement outlook of its shareholders. Furthermore, the moment you decide to empty that basket it’s likely that the rest of the world will have come to the same conclusion.
It’s better to diversify with index funds as core holdings and (if you must) have a small percentage allocated to employer stock. Employees are understandably emotionally attached to their employer’s stock (ask anyone that works for Coca Cola). Loyalty is a great virtue but it must be balanced with prudence.