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What's in Your Retirement Plan?

May 7, 2010
If you put together a portfolio and look at your retirement plan and all assets as pieces of the portfolio, the more diversified you are, the better your chances are of not coming in last.

by Derrick Handwerk, MBA, CWPP, CAPP

After years of being a wealth advisor, my experience is that many people with a net worth of under $5 million dollars have a large part of their investible assets inside their retirement plan or in an investment account holding stocks or bonds.

These people have stocks, bonds, cash, and maybe real estate as choices inside their retirement plans. As I have written previously, there are about 15 asset classes; however, many people only have three or four asset classes represented in their 401 (k) or retirement plans.

Additionally, each asset class can have a multitude of subcategories. Probably most familiar to investors are the various types (or subcategories) of bonds. A short list of bond types would be: government guaranteed, quasi-government-sponsored, corporate, and municipal. The above categories can be in various lengths from a short to a long duration. The corporate and municipal bonds also have varying degrees of credit quality. All of these types of bonds represent one asset class.

According to Hewitt Associates LLC, 57% of 401(k) plans offer just one bond fund. Compounding this potential problem is the trend over the past year of the retail investor investing more money in bonds. The comes the trifecta, or limited choice, consisting of investing more in a limited variety of bonds without the realization that if interest rates rise, bonds could lose money.

As a point of clarification, bond investments are subject to interest-rate risk. When interest rates rise, the price of most bonds can decline. If this happens, the investor can lose principal.

The goal of most portfolios should be to strive to hit a predetermined metric with the least amount of risk. I like to use a horse race as an investment metaphor. If you have a high percentage of bonds in your portfolio, you are betting on bonds to win the race. If you add stocks, now you have chosen two horses to win the race.

If you look at a horse race, such as the Kentucky Derby, the winning horse runs 1.25 miles in about two minutes. We can look at this metaphor from the perspective of the field of horses running in a race. The difference between the top five horses (first place to fifth place) is less than five seconds for the past 20 years, according to the Kentucky Derby. That is a very small margin of variance. To continue the metaphor, would you rather pick one horse to win the race or pick the field to increase your chances of winning?

Let’s jump back to investing. The problem with owning a lot of bonds in your portfolio is that, in my opinion, we are near the bottom of interest rates. What if you need to start withdrawing your money as rates increase?

The same logic holds for stocks. Depending on whom you cite, many people have called this past decade the “lost stock decade” due to the horrid return for stocks during the decade. You understand what I mean if you know someone that started retirement after 2008 and was invested in stocks.

When you are investing, would you rather bet on one asset class or on several asset classes? In any one year, stocks or bonds may win the race, but by betting on several more asset classes, your chances of winning may go up and the chance of your horse coming in last may go down.*

I work with providers that allow investments outside of the typical stock, bond, and cash 401(k) platform. Most people don’t know this is possible. Again, you need to consider that “alternative” investments may not be suitable for all investors.

I also believe that if you put together a portfolio and look at your retirement plan and all assets as pieces of the portfolio, the more diversified you are, the better your chances are of not coming in last.

Derrick Handwerk received his MBA from Lehigh University and is a Rauch Business Scholar. He received his certification in wealth preservation and asset protection from the Wealth Preservation Institute. After college, he spent three years in the pharmaceutical industry, and then went on to run and own several businesses, including Handwerk Wealth Advisory. Handwerk Wealth Advisory works with accredited investors and small business owners. He also specializes in working with medical and dental practitioners. Visit his Web site at

Although diversification may not eliminate risk, it seeks to maximize the performance of investment portfolios, but does not guarantee greater or more consistent returns or against losses.

The information presented is general in nature and should not be considered legal or tax advice. Readers should consult their legal or tax advisors for information concerning their own specific tax situations.