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Are you making the big 401(k) mistake?

Wednesday, 19 Feb 2014 | 7:10 PM ET
Don't put savings in same basket as paycheck: Cramer
Wednesday, 27 Nov 2013 | 6:15 PM ET
Mad Money host Jim Cramer says diversification comes before everything when you are investing whether it is in your discretionary portfolio or 401(k). Never put retirement money in the stock of the company you work for.

(Click for video linked to a searchable transcript of this Mad Money segment)

Plenty of market mavens will tell you what you should do with your 401(k). Only Jim Cramer will tell you what you must absolutely avoid.

If your company has a 401(k) plan, chances are you're making a contribution with each paycheck. Unfortunately, you may be throwing some of that hard earned money out a window.

Cramer says it's a widespread problem and most people don't even know it's happening.

That's because many people use 401(k) money to buy the stock of the company they work for.

"More people put their retirement dough into the stock of their employer than any other investment. I cannot stress enough how misguided this is," Cramer said.

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That's because putting such a large percentage of your holdings into one stock, any stock, prevents your portfolio from becoming diversified. And as far as Cramer is concerned, the number one rule of successful stock investing is diversification.

"If you expose too much of your portfolio to the same sector, you're running an enormous risk," Cramer reminded. "Suppose you had all of your money in a tech stock before the dotcom collapse, as many people did, you would have been virtually wiped out."

And the issue hardly ends with technology, which admittedly can be a higher risk investment. Cramer says the phenomenon is at play right now, especially if you work for a company that's a market stalwart.

"Let's say, at the beginning of 2013, your entire portfolio was largely in your employer's stock which is a high-yielding dividend stock. It's an area of the market that had been performing well for years and considered relatively safe. However, in the spring of 2013, interest rates began to rise, and all of these high-yielding stocks, which were basically trading as bond alternatives, got crushed. So if most of your portfolio, or even one third of it, was in a high-yielder, you lost a lot of money," Cramer said.

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Now make no mistake; that's not to say Cramer thinks putting money into a 401(k) has little value – that's not it. He wants you to contribute, especially if your employer matches. "I'm never one to turn down free money," Cramer said. "I think you should contribute as much money as your employer matches."

Just don't pour it all into the stock of your employer or any other single stock for that matter. "Diversification comes before everything else when you're investing," Cramer said.

Call Cramer: 1-800-743-CNBC

Questions for Cramer? madmoney@cnbc.com

Questions, comments, suggestions for the "Mad Money" website? madcap@cnbc.com

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