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So What's the Smart Retirement Money Doing?

The Employee Benefit Research Institute (EBRI) recently released a very interesting IRA study showing how IRA owners are invested. While the study did not look at 401k plan investments, you can bet the principles apply just the same. Some of the results were certainly expected (older owners have more invested in bonds than younger owners), but there are some good lessons in there for anyone who owns an IRA today. And those lessons come from your peers.

For instance, let’s compare how an IRA owner with a $25,000 balance is invested compared to an IRA owner with 10 times that amount--$250,000. The “small” account owner has half as much in bonds as the “big” account owner, and the big account owner has about 1/3rd less in stocks than the small account. The big money has about 20% more in money market funds than small money. And most startling, big money has over twice what small money has in “other” investments (things like real estate, annuities, etc.).

So what do you think that “big” IRA money knows that “small” IRA money does not? Diversification is a good investment approach—even back in 2008 (the time period the data was analyzed), when the stock market was terrible. And diversification means going outside the box of your typical stock/bond/cash investment mix; that’s what smart money does, especially when times are tough.

Now it is possible that the “big” accounts are more diversified than the “small” accounts simply because the big accounts have more money to invest. That may be true (the study didn’t address that possibility). But even if that is the case, there’s a lesson there for any retirement saver who hopes her IRA account will grow: diversify as your account grows. That’s what smart money does.

Can an IRA/401k investor with only $25,000 to invest find investments in “other” categories like real estate, commodities, annuities, etc.? You bet. If there’s anything the mutual fund and exchange traded fund industries do well, it’s offer more than 31 flavors. Like ice cream makers, if you can imagine a narrow niche you want to invest in, there’s probably a mutual fund or exchange traded fund already waiting for you. And that includes traditional categories like stocks and bonds, as well as real estate, commodities, energy, healthcare, precious metals, international bonds, “green” companies, faith-based investments, etc. So there’s really not much reason for any IRA investor not to hold a diverse mix of investments.

 Take a look at your IRA/401k account today. Are you diversified beyond the big three (stocks, bonds and cash)? If not, do what the smart money does: mix things up. That’s a free lesson anyone can learn from the smart money.

(By the way, the study did look at the differences in how men invest their IRAs versus women and found not much difference at all. Both sexes are equally smart—or maybe not so smart, depending on your point of view).

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Comment   |  7 years, 10 months ago from Orland, IN