Portfolio diversification helps investors to avoid disastrous investment outcomes. This benefit is most convincingly illustrated by examining what may happen when individuals have not diversified.

Usually it is impossible to observe how individuals manage their personal investments. However, in the case of United Stated 401(k) (this is an employer sponsored individual retirement savings plan) individual retirement portfolios, it is possible to see the results of individuals’ investment decisions. When their retirement portfolios were examined, it was found that some individual participants make sub-optimal investment decisions.

During the 1990s, Enron Corporation was one of the most admired corporations of United States of America. A position in Enron’s share returned over 27 percent per year from 1990 to September 2000, compared to 13 percent for the Standard & Poor’s 500 Index for the same time period.

During this time period, thousands of Enron employees participated in the company’s 401(k) retirement plan. The plan allowed them to set aside some of their earnings in a tax deferred account. Enron participated by matching the employees’ contributions. Enron made the match by depositing required amount in the form of Enron shares. Enron restricted the sale of its contributed shares until an employee turned 50 years old.

In January 2001, the employees’ 401(k) account was valued at over US $2 billion, of which US $1.3 billion (or 62 percent) was in Enron shares. Although Enron restricted the sale of shares it contributed, less than US $150 million of the total US $1.3 billion in shares had this restriction. The implication was that, Enron employees continued to have large amounts of Enron shares even though they were free to sell them and invest the proceeds in other assets.

Unlike most stories, this one does not have a happy ending. Between January 2001 and January 2002, Enron’s share price fell from about US $90 to zero. Investors, employees and retirees who had invested all or most of their savings in Enron shares experienced a financial ruin. The hard lesson that the Enron employees learned from this experience was to “not put all your eggs in one basket”. That’s exactly what portfolio diversification is all about. Dulton Group helps you to achieve this goal effectively.

Unfortunately, many typical investors did have most of their eggs in one basket. As a result, they were financially dependent of the viability of Enron’s returns. Hence any financial distress on Enron would have a material impact on all of these investors’ financial health. The subsequent bankruptcy of Enron resulted in stoppage of its operations, and its shares become worthless. Hence, it was disastrous for all of these investors who relied so much in the returns of Enron, but did not diversify their risks.

You should always look to diversify your risk. If you are not sure about the right financial decisions, take help from experts. Dulton Group is a top notch investment service firm who can make sure you are taking the right steps at the right time.