This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Don't Fall for Fake 401(k) Diversification

NEW BERLIN, Ill. ( TheStreet) -- Sometimes we fool ourselves. Sometimes we think we're doing the right thing, when in fact the result is that we're not at all doing what we think we are.

I'm talking about your investment diversification. When you started your account, you were probably dazzled by the array of choices: a stable-value fund, three large-cap stock funds, a midcap stock fund, an international stock fund and two different bond funds. Recalling an article you read somewhere, or maybe your co-workers talking about around the water cooler, you knew you needed to split your investments among many allocation options. Wanting to do this diversification thing right, you split your 401(k) contributions with one-eighth in each of the funds available. You're well-diversified now, right?

Not even close, bucko.

Just because you have investments split among several funds doesn't mean you're diversified.

Just because you have your investments split among five (or seven, or nine or what have you) different investment choices doesn't mean you are diversified. Recently I reviewed a 401(k) account in which the participant had chosen, all within the domestic equities class, eight different mutual funds. All eight were fine funds, with relatively low expenses and good diversification.

The problem is that the eight choices made were roughly equal to one: a total stock market index choice. The participant could have accomplished the same result by choosing only one fund, greatly simplifying the account and, as it turns out, reducing internal expenses dramatically.

The real problem though, is that the participant had not allocated any of the account to fixed income, or international equities, or real estate, or any other asset class that gave the account true diversification.
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $95.03 -2.90%
FB $116.73 7.20%
GOOG $691.02 -2.10%
TSLA $247.54 -1.60%
YHOO $36.59 -0.97%


Chart of I:DJI
DOW 17,830.76 -210.79 -1.17%
S&P 500 2,075.81 -19.34 -0.92%
NASDAQ 4,805.2910 -57.85 -1.19%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs