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January 11, 2019

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.”

This saying first originated from farmers carrying chicken eggs from the hen house. If you collected all the eggs in one basket and accidentally dropped that basket, it’s possible all of the eggs could be broken. However, one is unlikely to drop two baskets!

Likewise, diversification in your funds means not putting all of your money in investments that behave the same way. They can all go up at the same time, but that means they will inevitably go down together too. This is what happened to many people in the 2008 drop and it caused numerous individuals to panic and get out of the market.

If you have been following some of our previous weekly segments, you are aware there are 24 asset classes available which can help fully diversify your investments. That’s because they move differently from each other in different market environments. So, like the baskets, it is unlikely that they will all drop at the same time. Especially if the eggs are spread out between 24 baskets!

Unfortunately, very few 401(k) plans contain all 24 asset classes. So if you want to check your plan for them, first check to see if your plan has

  • Large Growth Companies
  • Mid Growth Companies and
  • Small size Growth Companies

If it does, you know that you have at least three of the asset classes you need. You can work from there to begin to fully diversify your portfolio. Tip: You will find these descriptions close to the name of each mutual fund.

We will continue our discussion on learning how to diversify your 401(k) investments in future posts.

Have a wonderful weekend!