Monday, March 21, 2011

The Time of Your Life: Boomers Have Choices to Make

I wanted to take moment to address Baby Boomers, both early and late. Now this doesn't preclude those who fall into the various other generational groups that have emerged on the scene since that term was coined. In fact, those among you that are young(er) could benefit even more by the following retirement planning suggestion than Boomers could. But it is all about the timing.

There are two things which continue to pop up in missive such as these. Diversification is always key and should always be part of the subtle and not-so-subtle conversations about about investments. Although only a few of us actually achieve this, it is still worth the effort. Why do you ask is this simple sounding process, one described as not investing all your eggs in one basket so hard to accomplish?

Diversification is often too easy to explain away, either by the successes you may have achieved while ignoring it or simply by complacency. In other words, you know better but have an excuse why you fail to do anything about it.
Suppose for example you purchased the stock in your company's 401(k) plan because, it was perhaps inexpensive to do so (lower than open market transaction costs might be a reason) or because it is the only match the plan offers to something like I-really-believe-in-the-business you work for also believing it will always be great and therefore, worth investing in).

All good reason to buy the company. Yet we often buy so much that if something did happen and something always does, we create an imbalance in a plan that is meant to last a lifetime. You know better and often only acknowledge the fact after it is too late to do anything. Diversification could be as important as being the eleventh commandment.

The downside consequence of failing to diversify and be reversed in a number of different ways. You could educate yourself about what the plan offers and in doing so, do what you had been promising yourself you would do for a long time. You will find out that if your company is among the top 500, you probably own additional exposure in an index fund, in a large cap equity fund, perhaps in a target date fund and even some exposure in a fixed income fund as well. Combine all of those together and you can no longer claim to be diversified. If you ever could make the claim.

You have a wide variety of funds in a 401(k). Most offer about 20 options and even if those plans are costly (many 401(k)s have boasted that they have found funds with lower expenses and then turned around and raised your administrative costs), they are what you have to work with. So spread out you exposure to one stock across all of those funds. If you have more than 20% of your 401(k) in one stock, you have too much. And there are more than a few of you who have over 70% invested.

Now I mentioned this was directed towards Boomers and I also mentioned there were two things. The other is asset allocation. Diversification and asset allocation are not one in the same yet are close enough to be inseparable. Often, looking to achieve one, you will help fix the other.

Asset allocation suggest that because you can choose from so many different types of investments (stock, bonds, funds that offer both, commodities, and perhaps other investment options as well) you should be taking steps to minimize the risk you may have taken in your youth so as to protect what those risks have rewarded you with. Because there is only so much money to go around, moving from a big exposure in stocks to something more conservative, such as a fixed income investment, could help solve the diversification issue.

Not always though. I'd be willing to wager that if you do begin, perhaps as part of this suggestion to realign your assets, you will probably sell your investment in the company store last. And by doing so, you increase your exposure to one investment and by default, actually decrease your diversification - or what little you had. If you must, put a number that you are trying to get that outsized investment in your company's stock down to and sell it to get there. Perhaps 20% would be as good a goal as none.

Now back to the Boomers. You have two opportunities to help you with both your asset allocation and your diversification issue, if you have any. And it is all about the timing. Coming up in April 1st, those who are 70 1/1 need to begin taking distributions. The first wave of baby boomers officially retired this year as well. If you haven't changed your asset allocation or diversified your investment significantly to protect yourself, choosing which money to begin spending can help.

If you begin disbursements this year, sell off the stock side of your portfolio first. This keeps any failure on your part from becoming bigger as time goes on. The longer you hold on to equities, the longer your risk stays high.
Now some of you close to retirement can achieve somewhat the same effect by investing any tax return (or bonus) into a fixed income fund. You have until April 18th to do this; later if you are filing an extension.

You can also begin to redirect how your money is invested in your 401(k) as well. Less going to stock and more towards protecting what you have earned is always sage advice but few of us actually sell one thing to move into something more conservative. Particularly if there is a nice run on the stock market occurring at the time. Waiting until a bear market simply means you waited too long. Target date funds are attempting this but have yet to prove that they can achieve this.

There is only so much money to go into your retirement account and if you are maxing it out, congratulations. But if you aren't increasing your contribution levels can help you achieve both asset allocation and diversification, simply by choosing something new that fits the concept.

Paul Petillo is the managing editor of and a fellow Boomer.

1 comment:

simonn said...

Great Article. Diversification is something you can do to optimize returns. It isn't that difficult and it makes the most of what you have invested.