As a young father, I’ve experienced a great deal of joy watching my toddler learn and grow. A few months back, my wife and I started giving him finger foods, allowing him to feed himself. We soon found that he loves Goldfish crackers, and he embraced the thought that “if one is good, a whole handful is better.” We’re still trying to teach him that a mouthful at a time is not the best idea. More isn’t always better, and you can have too much of a good thing.
This same idea can be applied to retirement investing. “Don’t put all your eggs in one basket” – it’s the common saying used to teach the concept of diversification. But is it possible to have too many baskets, or in other words, can you spread your retirement savings across too many investments? To answer that question, let’s first examine why it is important to diversify.
The purpose of diversification is to control risk. If an investor had placed all of his money in the housing market about seven years ago, he could have experienced a substantial return. However, that same investor could have lost a lot of money just a year or two later.
If that same investor had placed his savings across a few different asset classes, he may have still lost money, but not to the same degree as if he had not diversified his investments. Additionally, he would have still benefited from the housing boom by having a prudent portion of his savings invested in housing.
While there are dangers in not diversifying your retirement savings, there are also dangers on the other end of the spectrum, or over diversifying your 401k savings. You may look at your employer’s list of investment options and say to yourself, “I’ll just put a little into each. That will eliminate my risk.” But there are a few reasons to avoid that thought process:
- Risk and Return Go Hand-In-Hand. By over diversifying, you may reduce your risk, but it may also reduce your return. Some risk is necessary to accomplish your goals for 401k returns.
- Not Every Investment is a Good One. Fund managers have a goal of selecting the best investments so that they can give returns that meet or exceed expectations. If a fund manager were to take a bit of everything, it is no doubt that some of those investments would be inferior.
- Not Every Investment Fits Every Investor. At Smart401k we give recommendations tailored to the individual. No two investors are the same, and it is important to find the right mix of the right investments for the individual.
Keep these concepts in mind as you review your 401k investment options and plan for your retirement. As you apply these ideas and strive to keep a proper balance within your retirement account, you will place yourself in a better position to accomplish your retirement savings goals.
What are your thoughts on diversification? Let us know in the comment section.
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Smart401k is a web-based investment advisory service providing unbiased recommendations to help people invest in employer-sponsored retirement plans. Smart401k provides service to nearly 11,000 clients who collectively have more than $2 billion in assets. Plan participants receive personalized, fund-specific investment recommendations and the support of professional investment advisers available to discuss all investment questions. Based in Overland Park, KS, Smart401k is online at www.Smart401k.com.