What Investors Can Learn From The Enron Mess

The largest bankruptcy in u.s. history offers valuable lessons on how you should invest in today's market

its price tumbled.

How much of your portfolio should be devoted to the stock of a single company? Limit investments to no more than 5% of your holdings. “When you start getting more than 5% of a concentration in any one area, that position is going to start to have greater influence on what your overall performance is likely to be,” says Bridgeman.

While Dale Bryant, CEO of The Bryant Group in New York, agrees with the 5% rule, his preference is for investors to steer clear of their employer altogether. If you receive company stock as a 401(k) match, or must take it as part of your compensation package, “sell it as quickly as you can and reallocate the money among other investment choices in your 401(k) or elsewhere.” For one reason: Small investors who hold individual stocks are more likely to be at the mercy of volatile markets. “The regular investor doesn’t have the time to react [to volatility]. They’re not a professional looking at a screen all day checking price movements,” he says. “When something bad happens, the speed of the market will pull your portfolio down in a matter of seconds.”

Lesson No. 3: Evaluate your mutual funds
Although a mutual fund offers less risk than your company’s stock, thoroughly examine its holdings. At one point, notes John Kartsonas, an industry analyst with Standard &
Poors, institutional investors held roughly 64% of Enron’s outstanding shares (as of October 16, 2001). As a result, such Enron-heavy funds as the Galaxy II Utility Index (IUTLX), AIM Global Infrastructure (GIFAX), and Turner New Energy & Power Technology (TNEPX) racked up huge losses over the past year. (See chart on this page.)

So know what you’re buying. Before investing a single dollar in a fund, examine its current holdings and review their prospectus to gain a full understanding of its investment policies and guidelines.

Also, make sure there isn’t an overlap of your stock funds’ holdings. “You could have an AIM Fund and a Fidelity Fund that appear to be different, but they’re not,” Bryant says. “Check the top ten holdings of your mutual funds, just to make sure that they don’t duplicate each other.”

Lesson No. 4: Understand the stock you buy
Before you invest, fully understand the business model of the company — even if it’s one you work for. Know how your company generates revenues, spends money, earns profits, and invests dollars. Closely investigate how its earnings are measured and presented. By doing so, you may be better able to discern its profit potential and future viability. If you’re still fuzzy about the company’s prospects, or the numbers, think twice about making an investment. You see, the Enron mess offers you the most important revelation of financial life. Ultimately, the responsibility for managing your portfolio is your’s alone.

Here is a sampling of mutual funds that had significant assets in Enron stock as of June 30, according to fund tracker Morningstar. Also shown are the funds’ total returns in 2001. Most funds haven’t yet published

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