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Are you making the big 401(k) mistake?

(The video above was first made available Aug., 23, 2013. Click to go 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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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."

Of course the Dotcom collapse was a while back. But that doesn't mean the issue isn't pressing. Cramer said it played out, again, just last year.

"Let's say, at the beginning of 2013, your entire portfolio was largely in your employer's stock which was a high-yielding dividend stock. That was an area of the market that had been performing well for years and considered relatively safe. However, in the spring of 2013, 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 your employer's stock and it was a high-yielder, you lost a lot of money," Cramer said.

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Now 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

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