Big-Picture Diversification

Scott Holsopple
May 1, 2012

Investing in 401(k)s may be the most popular way many Americans prepare for retirement. When you're creating your retirement savings and investing strategy, though, there's more to consider.

Let me backtrack to March and point you toward a post I wrote about asset class diversification. In fact, diversification can extend far beyond your 401(k) plan. To approach your retirement strategy with a big-picture view of diversification, you'll want to consider additional categories.

(1) Your taxable investments should play a part in your savings strategy. Placing some savings in a standard investment account that you've earmarked for retirement means you'll have access to the money if an emergency comes up prior to retiring.

Unlike investing in a 401(k) plan, which has penalties for withdrawing money before you reach a certain age, taxable investments may not have the same early withdrawal issues. Be careful about making assumptions, though. Some taxable investments may have fees associated with redemptions.

(2) If you're a homeowner, you're a real estate investor. You may also have land, rental properties, or a vacation home. Coming off a memorable dip in real estate prices, we can walk away with a lesson: Don't buy something you don't want to keep for an extended period of time (10+ years).

The amount of equity you have in a property, or the degree to which you're under water, should factor into your retirement planning. Think about whether you'll want to retain real estate investments through your golden years or sell them to fund part of your retirement. Consider the costs of upkeep compared with the alternatives; and remember to factor property taxes into your thinking.

(3) Annuities are probably the most commonly discussed insurance product in most retirement conversations. There are a number of annuity structures, so it's difficult to make generalizations about them. But, in terms of retirement planning, an annuity can be a good way to provide a guaranteed source of income. Typically, with annuities, fees are high and contracts may be difficult to break--the price paid for guarantees. For that reason, I don't believe annuities should be your only retirement investment. Rather, they can provide stability alongside other investments. Before purchasing an annuity, make sure it fits within your overall financial plan and consider speaking with a fee-only financial adviser if you have any questions.

(4) Material assets are collectables like vintage cars, artwork, coins, and stamps. Their value is highly unpredictable and determined entirely by demand--not a good description for a retirement investment. I'm not suggesting you diversify your retirement portfolio by purchasing a collectable item.

However, if you're a collector because you enjoy it and can afford it, you certainly don't want to forget these items as you're planning for retirement. If you're willing to part with them, set a price at which you'll sell, knowing you may never have the chance to do so.

The bottom line

It's probably neither necessary nor wise for most people to invest in each and every item discussed above. Pick and choose what works for you since every individual's situation is unique.

This big-picture style of diversification is designed to protect you against the volatility you could see in life--in the same way asset class diversification protects you from economic volatility.

Scott Holsopple is the president and CEO of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal.