Tuesday, February 10, 2009

How Much Diversification is Enough? My Retirement Fund Question

Given the spate of investment fraud, mismanagement and tanking market values, the issue of asset diversification has caught my attention. Basically, how much diversification is enough? I don't think that there is an easy answer to that question.

Currently, 100 percent of my retirement funds are in a well-known hybrid fund with built-in diversity. But I think I should call the investment adviser and re-allocate my small pool of assets. So far I've been lucky: My fund of choice outperformed the Dow Jones Industrial Average in 2008. The fund was down about 31 percent, versus a decline of about 42 percent in the Blue Chip index.

But in addition to the hybrid fund, I think that I should also consider a fixed-income fund and a cash-equivalent account. Here are my questions:

  • How much diversity is enough?
  • Should all funds be housed with a single investment firm?
  • If one investment firm offers funds from a broad mix of third-party mutual funds, is it best to select different providers for each asset class?
  • What about global diversification?

Those are a few of the questions, I plan to ask market professionals over the next few weeks. I don't plan to retire for years. In fact, I'll be happier if I keep working, but it's good to keep planning.




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1 comment:

Anonymous said...

These are great questions. Diversification is a multi-level question. In terms of asset allocation, its good to be diversified. By all means, talk to your adviser. Sounds like she or he did a good job by keeping you in the fund you have.

I do not recommend bonds at all right now. When interest rates go up, and they will, bonds are going to get clobbered.

I feel that the best approach from a safety standpoint and user-friendly standpoint is to have all the funds at a third party custodian - like Schwab or Fidelity or TD Ameritrade. You can buy many different families (suggested) yet get one statement. These companies are considered safe.

In terms of how to invest the money, that's a whole other issue and I'd be happy to comment - but I think I've taken up too much space already....)