Is Your Individual Retirement Account Extreme?

All things in moderation? Apparently, Americans ignore Ben Franklin’s sage advice when it comes to investing for retirement. According to the October 2014 report issued by Employee Benefit Research Institute (EBRI), almost 60 percent of individual retirement account (IRA) owners had their nest eggs in an “extreme” investment allocation in 2012. EBRI defines “extreme allocation” as less than 10 percent or more than 90 percent invested in a particular asset class.

More specifically, EBRI found that 23.7 percent of IRA owners have less than 10 percent in equities and 35.5 percent have more than 90 percent in equities. Furthermore, almost 1 in 5 IRA owners (18.5 percent) had more than 90 percent of their assets in bonds and cash.

Looking at overall results for the entire EBRI IRA Database in 2012 (representing 25.3 million accounts with total assets of $2.09 trillion), 52.1 percent of the assets were in equities, 9.5 percent in balanced funds, 15.1 percent in bonds, 12.8 percent in money market funds, and 10.6 percent in “other” assets. When combining the allocation of balanced funds to the equity allocation, the total equity exposure of IRA owners was 57.8 percent of assets.


When you read EBRI’s full report, “IRA Asset Allocation, 2012, and Longitudinal Results, 2010 to 2012,” remember that diversification among dissimilar asset classes is the only academically-proven risk control measure that delivers consistent, and potentially enhanced, returns. In spite of the across-the-board declines during the recession, spreading your money between stocks and bonds—asset classes that historically have responded differently to market conditions—is still your best defense against being hurt by poor performance in any one asset class. History teaches us that, like a seesaw, as some investments decline, others rise to offset those losses.

Additionally, you should diversify within asset categories by sub-asset class, even by investment style, i.e., large and small company stocks, value and growth stocks, domestic and international stocks, etc.. Note, too, that diversification in any asset category is always achieved more effectively through asset class mutual funds rather than with individual stocks. That’s true of all portfolios and in any market.

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