Diversification Pt. 3

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February 8, 2019
Diversification Pt. 3

Image Copyright Ted Grussing Photography – Used with permission

Diversification can be defined with the phrase: “Don’t put all of your eggs in one basket.” Likewise, diversification in your funds means not putting all of your money in investments that behave in the same way.

If you have been following some of our previous weekly segments, you are aware there are 24 asset classes available, which can help to fully diversify your investments. That’s because they move differently from each other in different market environments. Today we will continue our discussion regarding which investment selections you want to use in your 401(k) plan.

For simplicity’s sake we will not be covering all 8 bond classes (6 assets classes of US bonds and 2 non-US fixed income classes) today, as several are rarely offered in 401(k) plans. Typically, you can cover your fixed income allocation with what many plans and fund families call a “Total Return Bond” fund.  For now, just know that bond funds are important and we will come back later in our 24 pack segments to talk about this section further.

These next classes are unusual to have in a 401(k) plan, but are considered important and instrumental in diversifying risk in your portfolio. You can think of them as a defense team as in football.

There are six asset classes we consider as part of your defense team. These are:

  • Commodities (Which includes Oil, agriculture and metals)
  • Foreign REITS
  • US High-Yield Bonds
  • Foreign Bonds
  • Emerging Market Bonds

Historically, it’s important to note that each of these tend to go up and down in greater percentages than other classes. But, much more importantly, they also move through their up and down cycles at different times from each other. And better yet, they are likely to move up and down at different times than the rest of your diversified portfolio.

Since these 6 classes do tend to be riskier you do not want a large amount of your funds invested in them. But remember that even the small allocations can significantly reduce the risk in your portfolio over time.

Have a wonderful weekend!