Most investment advisors recommend diversification of investments to build long-term wealth. Thus, a recent report from the Employee Benefit Research Institute (EBRI) raised some eyebrows by reporting that almost 60% of IRA owners had “extreme” allocations.
The study included $2.09 trillion in assets distributed over 25.3 million IRAs of all varieties (Traditional, Roth, traditional from rollovers, and SEP/SIMPLE).
Extreme allocations for purposes of the study were defined as either more than 90% or less than 10% of an IRA’s holdings in any single investment type (for example, equities or bonds). The types of investments were divided into equities, bonds, money (liquid forms such as CDs and money market funds), balanced funds that contain a blend of stocks and bonds, and alternate assets such as REITs and annuities.
Balance is important, but there are times in life when so-called extreme holdings make sense – for example, if you are a young investor going heavily into riskier equities because you have time to recover from a bear market, or investing heavily in bonds well into your retirement years because a equities crash could be catastrophic at your age.
What can we determine from the distribution of the extreme allocations? Let’s look at some of the details.
- Equities Vs. Bonds/Money – The majority of the extreme allocations were equity-rich. 35.5% of the IRAs held over 90% in equities, with only 18.5% holding more than 90% in conservative holdings (bonds and money). As you would expect, the opposite is true on the low holdings end – 41.9% of IRAs held less than 10% in bonds and money while only 23.7% of IRAs held less than 10% in stocks.
- Age of Investor – One would expect this to correlate with age, with youth holding mostly equities and older investors holding mostly bond and money – but there is weak correlation at best.
For example, of those holding more than 90% in bonds and money, there was very little age-based change in the percentage between ages 45 and 84 (from 16.2% to 17.7% and not in order). A larger percentage of those 85 or older held more than 90% conservative IRAs (22.0%) – but this was also true for those below age 25 (20.7%) and from ages 25-44 (22.2%). This implies IRA holders are being conservative during the time they should be taking risks.
- Type of IRA – Roth IRA holders were more likely to have over 90% equities and less than 10% in money; traditional rollover and SEP accounts were more likely to have the opposite extreme.
- Account Balance – IRA holders with higher account balances were more likely to have diverse allocations, and those with balances less than $10,000 were far more likely to have extreme allocations – and these allocations were divided relatively evenly between extremely aggressive equity holding and extremely conservative bond/money holdings.
This could indicate a lack of sophistication and understanding, indifference…or perhaps, a smaller secondary account.
That conjecture highlights one shortcoming of the study – it concludes that a holding of more than 90% or 10% in any one category is extreme without any knowledge of the rest of the portfolio.
The conclusions are reasonable if the IRA in question is the only retirement asset that you have, but you may well have other balancing assets – for example, a bond-heavy holding in one IRA with a 100% equity holding in a different IRA account. Simply calling one investment extreme without context to any other holdings has little meaning.
The EBRI study may paint a more disturbing picture than is really called for, but it does strongly suggest that some investors are not periodically re-evaluating their IRA holdings and keeping their portfolios balanced in accordance with a sound financial plan. Do not be one of those people.
It is fine to have an extreme investment allocation – just have a good reason for it.
Want to retire in comfort? We have gathered some of the top social influencers in personal finance to share tips to help you dramatically improve your chances of one day retiring in style - 140 characters at a time. Download the free eBook "The #RetireeNextDoor Retweetables: 100 Best Retirement Tweets"
Let the free MoneyTips Retirement Planner help
you calculate when you can retire without jeopardizing your lifestyle.