“Diversification is protection against ignorance. It makes little sense if you know what you are doing.”
Warren Buffet
Last week, it was disclosed that roughly 43% of Warren Buffet’s Berkshire Hathaway portfolio is currently invested in one stock; Apple.
I am sure that Mr. Buffet and his team have many solid fundamental reasons for their largest single investment position. You can read about some of them in the Motley Fool article linked here.
In the investment management world, this concept is known as “overweighting.” Mr. Buffet has invested a higher than normal percentage of his fund’s portfolio to Apple stock.
This news reminds me of a very important investment management lesson for your company 401(k) retirement plan account.
For many years, the U.S. Large Cap Growth and U.S. Mid Cap Growth have been at the top of the list as the best mutual fund asset classes to own.
Since the U.S. stock market rally that begin in late March, the S&P 500 index mutual funds have dramatically improved. Those index mutual funds are now also worthy of your company 401(k) retirement plan mutual fund dollars.
A “buy-and-hold” portfolio of two or three of these top three mutual fund asset class choices would have been ranked in the top 1% of all professional money manager investment returns this year.
Every company 401(k) retirement plan menu has a handful of these mutual fund asset class options. So why don’t individual company 401(k) retirement plan investors have access to this information?
Mutual fund companies and company 401(k) retirement plan providers don’t want individual investors to overweight. Instead, they bombard individual 401(k) investors with the concept of “diversification.”
Diversification can be likened to a stopped clock. Eventually, the academic concept will be proved correct. Until then, you are instructed to own all available mutual fund asset classes. Just in case one begins to “outperform.”
Go online and look up the last one, three, and five-year investment returns of the default mutual fund options on your company 401(k) menu. Those mutual funds that are classified as U.S. Large Cap and U.S. Mid Cap will top the investment performance list.
If the NFL is able to have a season this fall, who would you bet on to win the Super Bowl? The Kansas City Chiefs, or the Cleveland Browns?
The Cleveland Browns just changed head coaches. Maybe in a couple of seasons, they can “turn things around” and become a competitive team. When the stock market is raging higher, why would you own even a small amount of stock in the Cleveland Browns equivalent mutual funds on your company 401(k) menu?
You don’t want to own any of the mutual fund laggards in your 401(k). You only want to own the best mutual fund options available to you depending on current stock market conditions.
Use some common sense. Don’t pay attention to the non-stop diversification hype.
Find an independent, third-party investment advisor who can provide a ranking of your default company 401(k) retirement plan mutual funds. Then you can “diversify” into the best mutual funds available.
Ric Lager
Lager & Company, Inc.
