When your company's stock goes bad

You put all your nest eggs in one basket, and now they've broken. It's time to clean up the mess.

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By George Mannes, Money Magazine senior writer

(Money Magazine) -- Question: My husband's 401(k) from a prior job - about 10% of our savings - is all in his old company's stock. It just dropped 50%. Do we leave it and hope it recovers? Or do we sell it and invest elsewhere? - Elaine Ricca, Forsyth, Ga.

Answer: Grit your teeth and sell.

You've probably already figured out, in brutally clear hindsight, that you had too much money in one company's stock. One of the hardest things to do, explains Cincinnati C.P.A. and financial planner Rebecca Pace, is to face the fact that you didn't make the best choice.

"It's the emotional hurdle that's holding you back," Pace says. "You don't really want to admit your mistake, but you have to."

Sell you must, since it's risky to bet so much of your retirement on a single stock - even if it hadn't been cut in half. "You need to protect yourself," she says. "And to do that you need to have your investments diversified."

What's more, it's folly to expect this particular stock to immediately recover fully. Remember, for a stock to make up a 50% decline, it has to soar 100%.

The easiest way to diversify? Roll over your old 401(k) into an IRA and redeploy the proceeds of your company-stock sale.

Where should you put that money? Depends. Step back and look at how your other assets are allocated. If you're comfortable with your overall mix, put the money into a diversified stock fund. Just don't let a single stock exceed 5% of your holdings. Not that you were going to do that again.

When 'low risk' means high anxiety

Question: A broker suggests I invest in alternative assets: non-publicly-traded REITs, equipment leasing programs and oil and gas development. He says it's a less risky way to get annual earnings of 8% to 10%. Your thoughts? - Doug E., Houston

Answer: Exit stage right. While there is nothing wrong with diversification via broad asset classes like real estate or energy, Answer Guy wonders whether these exotic pitches have less to do with your potential gains than with someone else's.

For starters, anytime a broker talks about high returns and low risk in the same sentence, the hair on the back of your neck should stand on end. Wish it weren't so, but there are no free lunches. Don't let any salesperson at a free-lunch seminar convince you otherwise.

Another turn-off: the fat fees that others will be making off your investment. For instance, in one major equipment leasing fund, 10% of your initial investment goes to sales and underwriting fees. You'll also be on the hook for all sorts of ongoing costs and insider transactions.

Ray Mignone, a financial planner in Queens, N.Y., adds that another problem with these deals is that you don't have much control over the people calling the shots. "You have to be in bed with good people," he says.

Perhaps the biggest downside: You'll be checking into a financial Roach Motel, with your money tied up for years. Unlike with stocks or funds, you just can't pull money out of these deals - at least not without taking a huge loss.

So when it comes to alternative bets, a safer play for most people is to invest through traditional, liquid vehicles like mutual funds and ETFs with energy and real estate exposure.

How does your religion affect your finances? Money Magazine is seeking families willing to discuss the dollars-and-cents expenses involved in practicing their faith - the cost of everything from religious schools and dietary restrictions to tithing and faith-based investment limitations. If interested, please email your name, contact information and family photo, along with a brief summary of your salary, savings and religion-related expenses, to gmannes@moneymail.com.  To top of page

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