I have met with hundreds of individual company 401(k) retirement plan participants since I began specializing in this investment advice niche in 1999. I run into the diversification monster in almost every meeting.
Diversification has been widely promoted to individual investors. Investment advisors and financial planners preach it constantly. Diversification is sold as the best way to insulate stock and bond market investments from unnecessary risks.
Diversification does nothing to improve investment returns. Since football season is well under way now, let me use a football analogy to help illustrate how poorly diversification serves most individual company 401(k) retirement plan investors.
What college football teams are most likely to reach the college football playoffs at the end of the season?
Are you and NFL fan instead? Ask yourself about the NFL teams most likely to contend for the Super Bowl next February.
I doubt many knowledgeable football fans would bet on teams like the New York Jets or the Washington team to be playing football in February. Instead, diehard fans would bet their hard-earned money on teams like the Kansas City Chiefs or the Seattle Seahawks to meet in the Super Bowl.
Strong college and NFL teams tend to be contenders each year. There are a few exceptions, but not very often.
The same investment management concept can be applied to choosing the mutual funds in your individual company 401(k) retirement plan account.
Large Cap and Mid Cap growth mutual funds have been the best to own for the last several years. Why would you limit the amount of your company 401(k) mutual fund choices in those asset classes?
Diversification is the only reason. Individual investors have been told to own small parts of all classes of mutual funds in a company 401(k) retirement plan account.
There is a clear disconnect between common investment management sense and diversification. In theory diversification is great. But that theory does not often apply to real life investment management decisions.
Being diversified in a handful of good mutual fund options is one thing. Owning the same handful of mutual funds regardless of its investment merits is another thing.
Poor mutual fund choices in your company 401(k) retirement plan account will always deliver mediocre investment returns with the largest part of your retirement savings.
Avoiding the bad mutual fund options on your company 401(k) retirement plan menu. Don’t sacrifice your long-term investment returns because of the last diversification article you read online.
You are taking all the stock and bond market invested risks associate with company 401(k) retirement plan investing. Own the best mutual funds available to you.
If you can’t figure out the best mutual fund options on your default company 401(k) retirement plan menu, then find an independent-third party investment advisor who can.
Ric Lager
Lager & Company, Inc.
