Do I need more asset classes?

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 Q. Do I really need more than a few basic asset classes for retirement? I have large U.S., small U.S., international and global bonds right now. I hear about all these specialty funds but it seems like too much, or not needed.

A. This is a great question for any saver.

The answer lies in three questions: What are your investment objectives in retirement? What is your risk tolerance? Can you meet your retirement needs with a basic asset allocation?

The rationale for a diversified portfolio is protecting against a rainy day, said Jim McCarthy, a certified financial planner with Directional Wealth Management in Rockaway.

“Have you ever noticed that street vendors often sell seemingly unrelated products – such as umbrellas and sunglasses?” McCarthy said. “Street vendors know that when it’s raining, it’s easier to sell umbrellas but harder to sell sunglasses. And when it’s sunny, the reverse is true.”

By selling both items – by diversifying the product line – the vendor can reduce the risk of losing money on any given day, McCarthy said. The same holds true for investing.

He said a well-diversified portfolio should be diversified on two levels: between asset classes and within asset classes.

He said within stocks, that means diversifying by size (large, mid, small), style (growth or value), sector (consumer, financials, health care, industrials, technology, etc.), and geography (U.S., Asia, Europe, Latin America, Japan, BRIC, etc.).

Within bonds that means diversifying by duration (long, intermediate, and short term), credit (core, government, credit, high yield, etc.), geography (global, United States, emerging markets, etc.), and currency (US dollar, euro, and local currency), he said.

He said you might also consider adding alternative assets to your mix.

“An `alternative investment’ is any investment that is not one of the three traditional asset types: stocks, bonds and cash,” he said. “Alternative assets can bring benefits to your portfolio by diversifying risk away from traditional asset classes. This is because most alternative assets have low correlation (mutual relationship) to traditional assets.”

He said there is a wide range of investments that fall into the alternative category, such as real estate, commodities, currencies, managed futures, private equity and hedge funds. But each of these has unique risks and expense characteristics, so you need to research them thoroughly before investing.

McCarthy said it’s also important that a portfolio rebalancing process be a part of your overall asset allocation strategy. You can use a time interval (such as semi-annually or annually) or percentage of assets (such as when an asset class is +/- X% away from your target asset allocation).

Be mindful of transaction costs and tax implications (for non-qualified accounts) when determining your rebalancing strategy, he said.

And finally, McCarthy agrees that too much diversification can be a bad as too little diversification.

“Remember, the key is your investment objective and risk tolerance,” he said.

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This story was first posted in July 2015. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.