MF Global’s Bankruptcy Reminds Investors of the Importance of Diversification

Despite regulatory efforts to curb derivative trading and leverage, MF Global declared bankruptcy after bets on European sovereign debt investments failed. MF Global clearly did not fall under the “too big to fail” category like some its investment banking brethren, and MF Global’s problems run deeper than poor trading. Customer trading accounts were commingled with the firm’s proprietary trading accounts and MF Global layed of more than 1000 workers worldwide. This story is strikingly similar to what many firms endured during the last credit crisis. While there are certainly more firms that will follow MF Global down this path, investors and brokers were given an important reminder regarding diversification.

The old addage about not putting all your eggs in one basket applies to MF Global. Investors and brokers that diversify investment portfolios in various stocks and sectors spread out risks of volatility and above average losses. Nonetheless, horror stories from investors and brokers that concentrated their investments in MF Global stock and or bonds are widespread. MF Global employees received stock from the company and continued purchasing additional shares in a concentrated fashion.

Employees believing in their employer and wanting to share in its success is very American. Employees have been engaging in this practice for generations, and when the company succeeds employees can and have built tremendous wealth from these practices. However, certain MF Global employees not only lost their retirement savings in the decline of MF Global stock, but also have lost their livelihoods with the same company. This “all in” approach has devastated many.

Because employees rely upon a company’s viability in terms of continued employment, concentrating your investments in the same company is not a good idea. Perhaps taking a 10% or less stake in your employer’s stock or bonds makes sense. You can take advantage of the company’s success without taking on unnecessary risk of losing a significant portion of your savings in the event the company fails. Investing more than 10% of your savings in your company is pure speculation.

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