Do you have your 24? Part 2

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November 2, 2018
Do you have your 24? Part 2

In recent past segments, we discussed the different fears that currently abound in the media about when the next bear market will begin. And, in our most recent post we spoke of the number ‘24’ and the difference it could make in your portfolio weathering the next bear market successfully. Today we will learn a little about this 24.

Any of you who are invested in an employer retirement plan will have a number of investment choices to choose from. But if you are to ask which choices you are invested in and why are you in them, you may not get as clear of an answer as you would like. That’s because the investment company representative that comes along with your 401(k) plan is probably not allowed to give you specific recommendations. So, often times, they will nudge you towards a simple choice, such as a target date fund or a conservative, moderate or even aggressive portfolio.

Investing in any of these type scenarios is not necessarily bad, but it may not be the best choice for you. Compare it to riding a bus with thousands of other people, none of whom you know and worse yet, none them probably have the same stop that you do—even though the name target date creates the illusion of the same stop. Your retirement may have the same start date, but beyond that there’s nothing you have in common with those other thousands of people on the same bus.

Now let’s get back to the 24, which protected investors in 2008 from a 50-55% drop. This 24-pack is made up of 24 different investment choices: mutual funds or exchange traded funds where each only contains one type of investment called an asset class. Asset classes have been historically shown to move differently from each other in market cycles—which are the normal ups and downs of the market. This behavior in asset classes cycling up and down and zig zagging among different asset classes is called non-correlation.

Some institutions and investment advisors use up to 24 asset classes. With this many differently performing asset classes, it is likely that some will be up and some will be down at any given time. So in 2008 the portfolios that dropped 50-55% probably contained too much of the same thing and not enough diversity.

We will continue to dive deeper into the 24-pack so you can answer with confidence:  what those investment choices are that you have in your 401(k) and why they are there.

Have a great weekend!