Safety In Numbers
I knew I was perhaps too concentrated in Washington Post stock (about 17 percent) and maybe a little light when it came to bonds (4 percent), but I figured I was pretty well off when it came to the rest of my stock investments. After all, I had investments in four stock mutual funds.</br></br>That was before I looked closer. Two stock mutual funds accounted for most of my holdings, and it turned out they had a lot in common. Two of their top five holdings were identical: Citigroup and Bank of America made up more than 4 percent of the holdings of one mutual fund and more than 8 percent of the holdings of another.</br></br>And it turns out I'm not alone. Most of us are not as diversified as we should be when it comes to retirement investments. At its simplest, diversification means investing in different types of assets.</br></br>When it comes to retirement savings, the choices are basically stocks, bonds, and cash and cash equivalents, such as savings accounts, certificates of deposit and money-market funds. Put all your money in a single stock, and you may be exposed to more risk than you realize -- as employees at Enron and WorldCom learned, to their sorrow. At the other extreme, invest completely in safer but lower-yielding investments, and you may be earning less than with a more diversified portfolio.</br></br>But you also need to spread your risks within each asset category. That's why so many investors choose mutual funds, which allow them to own a small portion of a large number of investments. But buying more than one mutual fund may not add much to the diversity of your investments if the funds are investing in the same companies. And sometimes they are, as I found.