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Check Your Asset Diversification Across All Accounts

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.