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Check Your Asset Diversification Across All Accounts

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I have a confession to make… given the limited amount I’ve written about making sure your investment assets are properly diversified, you’d think that my assets would be diversified right? I write about it often enough that I can’t possibly claim that I just didn’t think about it. In reality, I’m actually pretty lazy and lax when it comes to making sure I’m totally diversified but luckily, and I know this only because I did the math yesterday, I’m actually properly diversified – except it’s not entirely by design, which makes it bad nonetheless.

Last night I started wondering if I actually was properly diversified across all my investment accounts because I have a relatively complex retirement account structure. It’s not incredibly complex but I have a Roth IRA, a SEP-IRA, a 401(k), and a Rollover IRA. It’s more than the vanilla and likely more common configuration of just a Roth IRA and a 401(k), or similar deferred taxation employer sponsored retirement account; but ultimately the point is that I have four accounts. That’s four accounts with four interfaces with four asset distributions. If you abstract away the accounts and just look at the funds, I have around eleven securities. I have four custom ones inside my 401(k), two different Target Retirement Funds (Vanguard’s 2045 and 2050), a Total Market Index mutual fund, an S&P Index mutual fund, and three stock holdings.

Does Diversification In One Account Mean Diversification Across All Of Them? Potentially, that’s what I did and I got lucky. The problem is that your funds will grow at different rates so after a year or so, unless you’re rebalancing, your diversification will be out of whack. If you have target retirement or lifecycle funds, those allocations will change under you without your knowledge (this is why they warn not to use it with other funds, because the allocations change). A lot of factors come into play so it becomes important to double check your allocations at least once a year, when you rebalance.

I Lucked Out. After looking at all the funds and doing some math, I plugged it all into a speadsheet I made, I was pretty surprised to learn that I actually had 92.23% of my assets in equities (stocks), 5.55% of my assets in bonds, 0.86% in cash, and 1.36% in an “other” category. Is that correctly diversified? According the 120 rule, yes. It says that I should have 120% minus my age (27.167) invested in stocks, the rest in bonds. I should have 92.83% in stocks, compared to the actual of 92.23%, that’s pretty darn close for being completely by accident.

Consider Other Diversification Rules Too. 120 minus age only refers to the stock/bonds mix, it doesn’t consider other lines of diversification such as small cap vs. large cap (within equities) or domestic vs. international exposure. I don’t know any of these rules off hand, I don’t think there are any, but you’ll want a little bit of exposure in those dimensions as well.

Ultimately, you want to be on top of your retirement assets because it’s one of the most valuable assets you’ll have as you age. While it was easy for me to just let it fall to the wayside, confident that since I was diversifying my individual accounts, it wasn’t the right thing to do and it’s something I’ll have to review once a year when I rebalance.

{ 9 comments, please add your thoughts now! }

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9 Responses to “Check Your Asset Diversification Across All Accounts”

  1. plonkee says:

    I do this, but since I’m invested entirely in two different index trackers (a variety of funds but tracking the same two indices) its not too much of a problem. I’m 100% equities with at the moment with about 75% in the UK and 25% overseas. I’d like to up the overseas component, but otherwise I’m pretty happy with my stuff.

  2. NCN says:

    I was thinking about this very thing the other night…
    My wife has a pension plan – so that kinda stands alone, right?

    She has a Roth, I have a Roth, and I have a 403b… so I try
    to diversify across all of those accounts…

    But what about the ESA or 529? Where do they fit in?


  3. I’m not sure what you have can be called “asset diversification.” I mean all you have is equities and some bonds. Asset diversification refers to allocating your assets between real estate (property or REITs), commodities, and yes, stocks and bonds. Although, I personally wouldn’t call your portfolio “diversified,” it doesn’t necessarily need to be any different from what it is right now given the long-term goals that you have – in the next 40 years equities are likely to outperform most if not all asset classes. But closer to retirement I would probably want to be more diversified between different asset classes.

  4. JohnnyB says:

    Doing what you did doesn’t really tell you a thing. Likely you are much less diversified than you think. Want to check how diversified you are then check the correlations to the stocks you own. You may find that they all are greater than 80% correlated to one another regardless of market cap size, well maybe except for small co’s that have disengaged as of late.

    Asset Allocation worked when no one knew what it was or didn’t apply it. Going forward it will not carry the same benefit it once did now that everyone knows it. I feel fairly good in telling you that the next time we enter a correction or bear market all asset classes will go down in sync just some more than others. You need to look at alternative asset classes to have a chance going forward at properly diversifying.

    Just try to find an asset class that hasn’t been positive the past 4 years. It didn’t used to work this way. I think those that don’t understand are going to be in for another rude awakening.

    Recall a month ago when I said the advice you provide is too generic and thus is not helpful? This is one such example of providing shallow analysis.

    Those that read this article will walk away with the belief they are properly diversified if they have 4 different stock funds.

  5. bugmom says:

    One often overlooked account is the 401(k). Especially if you use a full service broker. Lots don’t analyze the 401(k) because it is not money they “advise” but it is a very important part of the mix and is the account most likely to put you out of whack. has a nifty tool called a “portfolio x-ray” that you can use to look at the AA of multiple accounts and to also check for overlap in your mutual funds. I haven’t used it in awhile (I should probably do another review) but I think it is either free or you can get a fre 30 trial. Something like that because I know I’ve never paid for it…

  6. jim says:

    JohnnyB: Yeah you’re right, it’s that correlation and covariance that makes a difference, I was just speaking from the perspective of diversification as it is commonly understood. I think the idea of that curve might be too complex for me to try to explain (that’s an indictment on my ability to explain it in written form, not an opinion of reader intelligence) on a blog.

    The advice you’re looking for me to give is not something I feel comfortable or qualified to give. Who am I to pick which class is best? Which class someone should use to diversify with? Folks sometimes need a reminder and that’s what I felt this post was about.

  7. mbhunter says:

    The 120 – age rule, along with managed funds that change the allocation automatically with time, encourage people to not think carefully about what they’re doing and lead to a false sense of security.

  8. Star Money Articles for the Week of October 22

    Here are some recent interesting posts from the MoneyBlogNetwork and beyond: Blueprint for Financial Prosperity reminds you to check your asset allocation. No Credit Needed got his van. Get Rich Slowly lists the seven habits of wealth. Consumerism Comm…

  9. Pinyo says:

    I am in the same camp as you in a sense that I don’t holistically diversify. I do approximate the diversification across accounts, but not to the exact percentages. Since each of my account has slightly different purpose, I tend to allocate each account individually.

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