define diversify

[crabbypatty]

I understand the "don't put all you eggs in one basket" theory. But practically speaking what does this mean for me?

Let me know if I'm on the right track with this:

1. Decide my comfort level with ratio of stocks to bonds
2. Within stock (MF) holdings, decide comfort level of ratio of small, mid and large cap stocks
3. Branch out to more than one fund in each type of stock holding S,M,L

Is there more?

[jIM_Ohio]

3) is not needed.

I do know people which "preech" 3)- they call it "manager risk" if investing in managed funds. The idea of using more than one fund manager in case "streak" for one gets hot or cold.

IMO, 6-8 funds shows proper diversification if chosen carefully. Some people get by with 2 or 3 funds...

[humandraydel]

Originally Posted by crabbypatty

Is there more?

International? Commodities? Real Estate?

[disneysteve]

I agree that #3 isn't needed. All that does is result in duplicate investments, not diversification.

I also agree that there are areas you didn't mention like international and real estate. I think you could go either way with commodities. Plenty of investors don't get involved with them, though they happen to be really popular right now so we are hearing more about them.

How many funds? If you are talking about a retirement account, you could have as few as one targeted retirement fund and get instant diversification. Otherwise, you probably need several to cover the different areas.

[crabbypatty]

I forgot about international. And I don't know a thing about commodities, time to start my reserach on that.

In terms of real estate do you mean brick and mortar real estate like owning a rental or is this the REIT that I've been hearing about on the boards?

[disneysteve]

Originally Posted by crabbypatty

In terms of real estate do you mean brick and mortar real estate like owning a rental or is this the REIT that I've been hearing about on the boards?

Either one would qualify. Personally, I have no interest in becoming a landlord so I'm invested in a REIT. There are lots of folks here who do own rental property, though.

[jIM_Ohio]

Originally Posted by crabbypatty

I forgot about international. And I don't know a thing about commodities, time to start my reserach on that.

In terms of real estate do you mean brick and mortar real estate like owning a rental or is this the REIT that I've been hearing about on the boards?

Here are some "lazy portfolios" I see advertised on other sites

50% "US stock market"
This is 75% large cap and 25%mid-small cap if person used "total stock market index" mutual fund
25% Total international stock market index
10% REITS
15% total bond market index


20% Large Cap Value
20% Large Cap blend (combo growth and value)
10% small cap value
10% small cap blend (combo between growth and value)
10% REIT
10% international value
10% international blend
10% government bond

REIT has made it onto many "lazy" portfolio's... issue I have is the people making these up are usually writers and might be no more qualified than you or I.

I tend to follow the second, but still do my own thing. I don't own REITs. I still need to fill an international hole or two before diversifying into Real estate. I follow the second because it uses the "value effect" which suggests value has (in the past) outperformed growth by a significant enough margin (.5-1.5% for large cap and up to 5% for many 5 year periods for small caps). My issue with second is not many "lazy" portfolio's recognize mid caps as an asset, and neither of the two mention microcaps.

START SIMPLE. I would not try to build any of those in one year.

I bought one large cap fund, and at same time created a watch list of 3 funds at every fund house worth mentioning. The watch list posted articles on each fund, I could read what others "said" about it, and 9 years later I am where I am now.

[crabbypatty]

Originally Posted by jIM_Ohio

START SIMPLE. I would not try to build any of those in one year.

The thing is, I'm just now pulling my head out of the sand in terms of financial stuff after a few years of ignoring it. So all of the posts here have been very helpful to me.

In one respect I am starting over and b/c of that I will open a Roth Target date fund as soon as my tax refund gets here.

But I also really need to adjust stuff I had from before. I have some money in old work plans I think I want to consolidate at one house. I also have a Neuberger Berman Guardian Fund (non retirement) that I need to decide what to do with. Maybe just keep it and do nothing, but then I can cross that section of diversification off my list and move the old work plans into other types of funds. I have enough to open a few different funds, I'm just trying to decide which ones.

[kv968]

Diversification basically means investments that have a negative correlation to one another. In other words, one investment wouldn't be affected by what affects another. Not to make things more complicated, but there's also degrees of diversification.
For example large- and small-cap funds are one form of diversification because they tend to act somewhat apart from one other. However if the entire stock market itself takes a hit (as it did a week or so ago) they are all affected to a certain degree. Now to take it to an extreme, you could compare owning stock to a piece of art as an investment. That is true diversification since the performance of one has relatively nothing to do with the other. Not that you should start investing in art but just to use it as an extreme example.

As some people have already stated, REITs, int'l and commodities have low correlation to one another. Sorry if all that makes it even more confusing.

Another thing to keep in mind when thinking of diversification is to make sure that each "account" is diversified within itself. And what I mean by "account" is investments that are all going towards the same thing goal (ie. retirement), not actual accounts with different companies. You can have a 401k and IRA but since they're going towards retirement you should consider them as one when deciding your diversification. For example, you said you're currently holding that Neuberger fund but it's not for retirement. Well you shouldn't cross that section off of your list when choosing retirement funds since it's not designated for that.

A target date fund, which you said you were going to go with, would be a good place to start and you could build off of that when you're ready.

[jIM_Ohio]

Originally Posted by kv968

Another thing to keep in mind when thinking of diversification is to make sure that each "account" is diversified within itself. And what I mean by "account" is investments that are all going towards the same thing goal (ie. retirement), not actual accounts with different companies. You can have a 401k and IRA but since they're going towards retirement you should consider them as one when deciding your diversification. For example, you said you're currently holding that Neuberger fund but it's not for retirement. Well you shouldn't cross that section off of your list when choosing retirement funds since it's not designated for that.

I have a different opinion on this. Each 401k for us "is it's own entity", and the combined IRAs between my wife and me "is it's own entity".

Within each identity, we allocate 45% large cap, 15% mid cap, 15% small cap, 15% international large cap and 10 % international small cap.

Logic is this:

IRA funds need to be "pick them and forget about it". I don't want to have to change Roth IRA funds numerous times. The Roth account is the core of the investment portfolio because it should be the one which lasts the longest.

However in my one job I've had for 10 years, I will be on my 4th 401k starting in 2008. My company has been bought and sold more times (4)... if each buy/sell (new 401k each time) made me buy/sell my Roth IRA (which holds some good funds which are closed), then I am doing too much paperwork because of "allocation" reasons.

Add to this my wife has had 4 401ks in 7 years, and 8 401ks in 10 years is too much "reallocation" whenever the 401k changes between the two of us.

Of course we have been blessed with excellent 401k choices (Vanguard, T Rowe, Fidelity lead the way on 4 of the 8 401ks). So it's easy to find a fund which meets my 45-15-15-15-10 target.

In my wife's 401k, she does not have a good small cap, so she has 30% mid cap
In both our 401ks, we are missing an International small cap, so we go 25% international large cap
In my 401k I am missing a mid cap fund, so I have 30% allocated to small cap.

There is minor movement... but when my 401k changes again in January (we were bought out about a month ago), I just have to look at the choices within the one entity, and leave rest of accounts intact.

[kv968]

Originally Posted by jIM_Ohio

I have a different opinion on this. Each 401k for us "is it's own entity", and the combined IRAs between my wife and me "is it's own entity".

You could do it this way also if it fits your situation, which by what you're describing it definitely does. What I'm trying to get at is if you have a 401k and an IRA the two accounts don't have to necessarily be balanced within themselves since they're going towards the same thing. Granted if they are individually balanced, when added as a whole, it should still come out somewhat balanced anyway. I'm just thinking more along the lines of a situation like mine where there aren't some good choices in my 401k for certain sectors so I supplement that with my IRA. If just looking at my IRA, the asset allocation is way off, but when added to the 401k it's the balance that I want.

And not to get off the subject at hand but since you evidentally have some extensive experience in it...when your company is bought and sold, can you then rollover your 401k into an IRA like you can when you leave a company? Or are you obligated to roll it over into the new company's 401k?

[jIM_Ohio]

Originally Posted by kv968

And not to get off the subject at hand but since you evidentally have some extensive experience in it...when your company is bought and sold, can you then rollover your 401k into an IRA like you can when you leave a company? Or are you obligated to roll it over into the new company's 401k?

Merger one was really a buyout, and we were given a choice to take our T Rowe 401k and roll it into new 401k, take cash out, or get an IRA. I had a 401k loan (had just bought house), and elected to roll into 401k.

selloff #2, no choice. The vaguard like 401k became a pure Vanguard 401k and has done well for 2 years.

buyout #3 is pending. I am expecting to roll this one over (this looks like first situation more than second one). If given the choice I am converting a rollover IRA, so most of my eggs are with T Rowe Price with selections of my choice.

[disneysteve]

Originally Posted by kv968

Another thing to keep in mind when thinking of diversification is to make sure that each "account" is diversified within itself. And what I mean by "account" is investments that are all going towards the same thing goal (ie. retirement)

Originally Posted by jIM_Ohio

I have a different opinion on this. Each 401k for us "is it's own entity", and the combined IRAs between my wife and me "is it's own entity".

Within each identity, we allocate 45% large cap, 15% mid cap, 15% small cap, 15% international large cap and 10 % international small cap.

To add another point of view, I only look at my overall portfolio when thinking about diversification. I make no effort to diversify each account. I think that would greatly complicate matters and could result in owning many more funds.

So if my Roth is in large caps, I don't need large caps in my wife's Roth. If I've got a good broad international fund in her 403b, I don't need one in my rollover IRA from my old job. If I've got a great small company value fund in my taxable account, I don't need another one in wife's rollover IRA. I prefer to look at the big picture when it comes to asset allocation. I think another advantage to this approach is it eliminates having to pick the best available fund from limited choices. If I needed 10% international small caps within every account, I might not have a good choice depending on the funds offered by that account. Does that make sense?

[Scanner]

We don't need to get "paralysis by analysis" here.

Yeah, to obtain diversification, some people (and I would be in that camp) think you need to have international, commodities, and real estate.

Some say you don't and I respect that.

Even in this last downturn, all of my investments went south and I own 1/3 of my portfolio in a commodity (but it seems to be recovering faster).

But practically speaking what does this mean for me?

What it means, CrabbyPatty, is by diversifying, you should be able to participate in all "bull runs" by any sector and limit your exposure to principal risk with the downturns.

Diversification is one way of reducing principal risk.

I also agree with DisneySteve - each "account" doesn't need to be diversified. My wife owns a domestic in her Roth, I own a Silver ETF and an Internationa in my Rothl. Because my Roth has done better, if we ever split, does that make things more complicated? I guess it does.

It would mean she gets more of the house and I get more of the Roth on seperation (provided we both want to leave everything untouched) and then both of us would need to theorectically "rediversify" after we went our ways.

I don't know - my brain hurts when I go over 5 funds.

[crabbypatty]

I'm wondering if maybe I should just roll the old work accounts into a target retirement fund , perhaps one with a different date than the Roth I intend to open. That could at least consolidate paperwork and allow me more time to research things.

[jIM_Ohio]

Originally Posted by crabbypatty

I'm wondering if maybe I should just roll the old work accounts into a target retirement fund , perhaps one with a different date than the Roth I intend to open. That could at least consolidate paperwork and allow me more time to research things.

Most people "overweight" large cap (the retirement funds even overweight large cap).

so you could choose a target date fund and be fine
you could choose a large cap fund and add more later and be fine

[LivingAlmostLarge]

I like value over growth. And I balance by looking at our entire portfolio. That means DH's sucky 401k is loaded with international because that's his best choice. Then we build from there. It's all one money, not subdivided based on Roth or 401k, etc.