Diversification of Portfolios: Case Study of Enron

Subject: Recognizable Brands
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It is indeed true that it was not the company’s fault when employees never diversified their investment portfolios. In any case, the 401 (k) plans did not put any restriction for employees to spread their investment risks (Bratton, 2002). A number of critics were quick to point an accusing finger to the failed organization. Nonetheless, the 401(k) savings tool was not responsible at all for the investment challenges faced by the Enron employees. This assertion was also confirmed by several financial planners from Mississippi. The reality of the matter was that Enron’s employees made their individual choices to leave their finances in the company’s stock.

According to the above savings tool, there were a total of 24 unique investment opportunities for Enron employees. Hence, they had the liberty to choose from the pool of options. Furthermore, Enron’s stock was just one of the options presented to the employees. It is interesting to note that the directed side of the employees commanded close to 90 % of the company’s stock.

Enron’s stock was used to match the employee’s 401(k) plan (Bratton, 2002). It is also understood that the same employees had no alternative in regards to the matching plan of their stock. This was quite a queer experience especially for a publicly traded company like Enron. Matching investment with cash would have been more costly than matching with stock (Sharpe, 2007). On the other hand, employees were fully to blame bearing in mind that they made individual decisions to invest at Enron’s stock. Hence, any eventualities that would have followed later were not supposed to be the responsibility of the affected company.

It is a common requirement for employees to invest in more than one plan. Besides, they are supposed to visualize revenues as part and parcel of their retirement scheme. These are core personal responsibilities that employers are not supposed to address. If a wrong investment decision is made, it fully remains the responsibility of the investor. Income should be accounted for as part of the available investment tool since income is gradually generated by salaries paid out to employees by companies (Sharpe, 2007). The strength of a company does not matter when it comes to risks and uncertainties at marketplace. There is still crucial need to diversify. Perhaps, the Enron employees who were affected by the failed 401(k) plan were fully convinced that the company would remain stable throughout their investment period.

In some instances, it can be helpful for employees to diversify in mutual funds instead of relying on a single investment plan (Ross, Westerfield & Jaffe, 2013). Needless to say, employees at Enron should have invested in various stocks. The latter can be a more strategic approach than investing in multiple companies. It may be cumbersome to diversify in extensive value-type funds. However, this option still offers access to certain vital industries. Diversifying in different types of stocks lowers the risks and uncertainties associated with the contemporary dynamic markets (Sharpe, 2007).

A portfolio may also be diversified through bonds. The risks associated with bonds are quite minimal and are sometimes considered to be negligible. Besides, bonds can assure a steady return over a given investment period. However, timing is a crucial consideration to make before bonds are purchased. Licensed advisors can provide the best investment decisions across stocks or companies (Ross, Westerfield & Jaffe, 2013).

From the above considerations, it can be concluded that employees at Enron were solely responsible for the failed investments because they had the opportunity to diversify in different stocks or companies. Furthermore, they never sought external investment advice from reputable advisers.

References

Bratton, W.W. (2002). Does Corporate Law Protect the Interests of Shareholders and Other Stakeholders? Enron and the Dark Side of Shareholder Value. Web.

Ross, S. A., Westerfield, R. W., & Jaffe, J. (2013). Corporate finance (10th ed.). New York: McGraw-Hill Irwin.

Sharpe, W.F. (2007). Expected Utility Asset Allocation. Financial Analysts Journal, 63 (5), 18-30.