NEW YORK (CNNMoney.com) - The stock of the company I work for has returned more than 20 percent a year over the past three years. This sounds very good to me, but I'm not sure whether to invest my 401(k) money in it because I also know that you should diversify. What do you think?

-- Gerald Roberts, Montgomery, Alabama

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I think it is almost always a mistake to put more than a small portion of your 401(k) in employer stock. And, in fact, I don't see anything wrong with excluding company shares entirely on the grounds that you've already got your financial security riding on the company because it issues your paycheck. So why double up?

I can understand that those 20 percent annual returns of the past three years look tempting. But you're not getting those returns. You'll get the returns of the next three years and the years after that. And no one knows what those returns will be.

In the face of such uncertainty, the only reasonable move to make is to spread your money around -- that is, build a portfolio that consists of dozens, or even hundreds, of stocks, and throw some bonds in as well. The easiest way to do this -- and, in fact, the only way for most 401(k) participants -- is to invest in a variety of mutual funds or the other pooled investments that are typically offered in employer-sponsored savings plans.

Granted, this approach doesn't protect you from "market risk." If the stock market goes down, your stock mutual funds are likely to decline in value as well (although if you hold different types of stocks -- value, growth, small and large -- they won't all go down by the same amount, and your bond holdings should act as a shock absorber).

But holding a portfolio of stocks instead of just one insulates you from what is known as "specific stock risk" -- that is, the chance that your holdings will be decimated because something happens to the company whose shares you own.

The most recent dramatic example of just how serious this risk can be is Enron, which imploded after its executives allegedly engaged in various acts of malfeasance. (For the latest developments at the trial of former Enron chairman Kenneth Lay and ex-CEO Jeffrey Skilling, click here.

But corporate shenanigans aren't the only reason a company's stock might take a major hit. A company with perfectly honest management might fall on hard times because the management is incompetent, or, if competent, perhaps the victim of economic forces over which the managers have no control, say, an influx of cheaper products from abroad. Or maybe the big product the company was counting on to grow earnings generates disappointing sales.

Fact is, American corporate history is bursting with examples of companies that once strode the economic landscape like a Colossus that later found themselves struggling for their very existence. Just look at Ford and GM.

So my question is, why take on this risk when you can so easily diversify it away? It's not as if your individual company is the only one that might generate juicy returns in the future. There are hundreds of companies capable of that, and you can own many of them by investing in a portfolio of mutual funds.

My advice: If you really, really feel you must invest in your company's stock, limit your investment to, say, 10 percent or so of the value of all your investments (that is, your 401(K) plus whatever other investment accounts you may own).

If you're in the position where you can't keep the value of your company shares within the range of 10 to 15 percent or so -- perhaps because your employer matches your contributions in company shares and restricts your ability to sell those shares -- then you should make a special effort to hold other investments that can act as a counterweight to the company shares. (For more on how to do that, click here.)

After all, the last thing you need is to spend much of your career faithfully socking away money in your 401(k), only to see your dreams of a comfortable retirement fall apart because your company's stock has. That would be not only financially devastating, but emotionally as well because it's so avoidable.

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Living off $500 grand

Getting a tax break without the 401(k)