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Diversify Your Retirement Savings Now!

May 27, 2011 · 72 comments

in Personal Finance

I was recently having a conversation with a friend about retirement.  She and her husband have had corporate jobs for about 25 years, and have steadily contributed to retirement accounts along the way.

I asked my friend when she and her husband thought they could retire.  She responded that she didn’t know.  We talked a little further about their retirement accounts, and she admitted that she really didn’t even know what her 401k was invested in.  What really scared me was that 100 percent of her husband’s retirement money was invested in company stock.  (The company that he works for.)  This really surprised me.  After Enron, I figured that every single person that was overly invested in any one company would instantly diversify because they saw the financial destruction that can happen if a company goes under.  However, I was wrong.

I am really puzzled as to why people who invest in just one company do not diversify their assets.  Maybe they are afraid of reallocating their assets and making a mistake?  I don’t know, but I can’t think of many greater financial mistakes than investing all your retirement eggs into one proverbial basket.  Sure, someone might hit the occasional home run, but the overall risk is way greater than the possible return.

I Am Begging You, Please Diversify

Retirement is a huge deal, and it is something that most people plan for their entire working life.  Given the importance of being able to afford to retire, why do people pay so little attention to their retirement investments?  Maybe it is because retirement seems so far off, or perhaps people just avoid financial decisions because they feel they are not knowledgeable enough.  However, you only need the some basics of personal finance to be able to look at your financial allocation to see that maybe adjustments need to be made.

For those of you that do not periodically evaluate your investments, you MUST change your ways.  There are so many online tools, there is really no excuse (other than laziness) to not sit down and evaluate your retirement portfolio.  Considering that retirement savings are often times a person’s greatest financial asset, it is shocking that people do not play a more active role in managing their retirement account(s).   The money saved for retirement is just as important as the money sitting in a checking account.  Of course, nobody in their right mind would ever pay so little attention to their checking account.  Probably because the implication of not properly tending to a checking account is more obvious and immediate.  However, ignoring the allocation of retirement savings can be just as financially devastating.  It just takes people longer to realize it.

For those of you that have not REALLY looked at a retirement statement in awhile, please take a couple hours very soon and evaluate your asset allocation.   There is no perfect decision, so don’t feel like you have to evaluate it to death. Whatever you do, make sure your portfolio will not be decimated if there is a market downturn or if a company declares bankruptcy.  You have to find your risk level, and allocate your retirement savings accordingly.  Also, use some common sense and consider your age when deciding how much to invest in stocks  vs. bonds or cash.  Also try to find a balance between Large, Small, and Mid Cap stocks, as well as Domestic vs. International investments.  (Side note:  Small cap stocks are usually riskier than Large cap stocks.)

The Lesson:

Don’t let ignorance and laziness prevent you from having the retirement you deserve after many years of hard work.  With the internet, it is easier than ever to research funds, check your accounts, and modify your allocations.   If you really don’t feel comfortable making financial decisions on your own, then talk with a financial advisor or a qualified friend or family member that can help you through the process.  Also, make sure you involve your spouse/significant in the decision making too.

How often do you evaluate your overall finances?  Do you know how your money is allocated?

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{ 63 comments… read them below or add one }

MoneyIsTheRoot May 27, 2011 at 8:45 am

Even though I routinely get criticized for investing in the Fidelity target funds (targeted by estimated retirement date) for their slightly larger fees, it’s automatic tool for diversifying and rebalancing without you having to do the guess work.

Reply

First Gen American May 27, 2011 at 8:58 am

I made this exact mistake and it cost me big time. About 80% of our savings were in 1 company stock. For about 9 out of the 11 years I worked there, it was our only investment option. When the company was doing well, no one complained, but when it started under performing, that’s when they added some index fund options.

I’m much hsppier by being diversified but now I’m thinking I still have too much in the market and want to diversify out of the market more.

This is very good advice from someone who’s been there and done that.

Reply

Miss T @ Prairie Eco-Thrifter May 27, 2011 at 9:41 am

We sit down and review our finances once week. We check our budget, our expenses, savings, everything. Keeps it fresh in our mind.

We have most of our investments in index funds at the moment which allow us to be quite diversified.

Great post and great advice. I think you hit the nail on the head.

Reply

No Debt MBA May 27, 2011 at 10:51 am

I agree that it is super important to diversify and even more so to diversify away from company stock. If your company is big enough to be publicly traded odds are it’s too big for your individual contributions to have any significant impact on its stock price. It would also really scare me to be dependent on my company for both my job AND all of my retirement savings. What happens if the company tanks and you’re 50 years old, jobless, and only have a small fraction of your retirement savings?

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retirebyforty May 27, 2011 at 10:56 am

When I first started working, I diversified my 401k investment. They did OK, but my company stock was shooting through the roof. So I like many of my co-workers moved a lot of our investment into our company stock. I thought – we had great products and the company is a market leader, etc… Guess what? Soon after the dot com bubble popped and we all lost a lot of money. Oh well, lesson learned. At least I didn’t lose that much money because it was early in my investing career.

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Kris May 31, 2011 at 3:16 pm

RB40- very common scenario unfortunately. There have been some very interesting financial lessons the last 15 years or so.

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Money Reasons May 27, 2011 at 11:30 am

After Enron and WorldCom, I changed my allocation in my retirement about from 30% down to 15%! I have friends that have most of their money in company stock, and it never recovered.

Great advice 🙂

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Kris May 31, 2011 at 3:15 pm

MR, do you ever reevaluate the 15 percent?

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krantcents May 27, 2011 at 12:27 pm

I have a rule of thumb that no single stock represents more than 5% of my overall portfolio. Do I ever break that rule? Occasionally, but only by 1%.

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Kris May 31, 2011 at 3:14 pm

Krant, that is pretty impressive you can stay within one percent of your goal. Great job!

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101 Centavos May 30, 2011 at 7:33 am

Good advice, and I suspect that many readers in the PF blog0sphere follow the same path. Sadly, many people do not. They will prefer to let “other people who know about money” like financial advisers take care of these details.

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Kris May 31, 2011 at 3:08 pm

101: I was actually talking to my friend that I wrote about, and she told me that I should write a post about not diversifying your retirement portfolio. Like you, I thought of it as a very basic concept. However, I did realize a large part of the population don’t always have the same perspective as those that plan their finances pretty carefully.

Reply

Robert Hoop October 26, 2012 at 4:06 am

Sure, it’s smart to diversify your investments, but what about diversifying your income streams to lower the risk of outliving your savings. Many advisors and investors proclaim that you shouldn’t run out of money if you only withdraw 3-4 percent per year from your stock portfolio.
Just like the foundation in your home is there to protect you during a storm, the foundation of your income plan should be guaranteed in case the perfect economic storm hits.

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