Is Diversification Enough?
Don’t get me wrong; diversification is essential. Yet, is it being done wisely?
Diversification is the process of spreading your investments over many different types of investments. There are two commonly held misconceptions about diversification:
The first common misconception is that spreading your money over 13 different stock funds is a form of diversification. This is not true because those 13 stock funds (all the same type) will probably go in the same direction at the same time. In today’s environment, it is about types of investments and not merely the number of investments.
Another misconception is that diversifying your investments initially and not revisiting them at least annually, is the proper way to diversify. This is not true because investment portfolios change with the market, and when the market gets risky, so does your retirement savings.
I want to introduce a new concept to you, and it is called strategic diversification. Regular diversification consists of investing a certain percentage in stocks and a certain percentage in bonds and rebalancing them once a year back to those initial percentages.
Strategic diversification is intentionally diversifying your portfolios based on the risk of the markets. Admittedly, it is your call on how risky the market is and how you invest. Sometimes you will be right, and sometimes you will be wrong. It still pays to be proactive in the long-term. A hurricane that is heading your way might hit, or it might not. That doesn’t mean you aren’t proactive.
Strategic diversification for your 401 K plan
Since you are mostly limited to stocks and bonds in a 401 K plan, you can develop a portfolio based on how much risk you want to take by investing in stocks versus bonds. Historically speaking, bonds take less risk than stocks. NOTE: Bond funds can lose money – this is historically speaking. If you want more information on this topic, you can go to my youtube channel and watch the video (How To Invest Your 401K)
Strategic Diversification for your IRA
IF you have money outside of a current 401 K plan (if you are over 59 ½ and have a current employer 401 K plan, you can move it to an IRA), you can always move your money to an actively managed investment account where the adviser has many other options to diversify your account strategically.
For more information, inquire here: ASK BOB
At the end of the day, this is about having a strategy for risk. Don’t just manage for growth – also manage for risk!