Diversifiaction AS An Investment Principle

[yakers]

On another post Mountain Mike said:

My philosophy includes diversification, and thus I have a 457, a 403b, a Roth, and a traditional IRA.

MM has a good idea, we discussed this at a Vanguard Diehards meeting last week. While diversification is usually meant to be stocks or stocks and bonds with quantifiable correlations there is a more basic principle as well. So I agree its good to have various kinds of funds including tax free (Roth) tax deferred, and taxable as well as having a range of equities and fixed income bits. It may not pay out as well as somehow being all in the best one in hindsight but it is a bit of insurance in that not only companies will fold but also taxes will change and some assets will be hurt more by inflation than others. So I think diversification is a great idea but it does get tricky to determine various allocations when a lot of the issues are not quantifiable.

So how many ways do you deversify as an investment principle besides asset classes? There are types of tax accounts, real estate both residential and commercial, gold and commodities.

Or has it been more effective to retire "on the horse you rode in on" and not worry about diversification?

 

[Spanky]

Is there a different definition of diversification other than dividing resources among different asset classes such as stocks, bonds, mutual funds, investment partnerships, real estate, cash equivalents, private equity, arts, commodities, etc.? The sole purpose is to reduce risk.

 

[Craig]

Yes, we've done that, and I do believe it makes sense.  Tax implications are a future unknown.

Our liquid assets are spread between 401(k)'s, taxable accounts, and some variable annuities.  In the future, we'll pull down accounts based not only upon the character of the investment, but also based upon the tax situation at that time.

Then we have real estate, which can be sold at capital gains rates (plus a little depreciation recapture), or traded into other real estate with no taxes, or ... held until death, which currently would cause those gains to escape income taxation.  Besides many more important thoughts of family and, hopefully, a life well lived ... it would be sweet at the end to know we won one match with the IRS.   

'Course, all of this is theoretical until the time finally comes ... and, if it doesn't work as planned, we'll do it differently ... in the next life ... 

 

[Bookm]

Could be I'm just a glutton for punishment, but I've tried to dabble in several types of investment vehicles. Once retired, DW and I will be able to draw from DRIPs, a ShareBuilder acct., taxable MM, Roth, 457, 403b and two DBP's. Taxes will be a constant, but what's taxed, and how it's taxed will most certainly vary in the coming decades.

Bookm 

 

[Mountain_Mike]

Yakers,
I'm flattered that you picked up on my comment. Along with the investment vehicles I mentioned, I also believe in holding several percent of my portfolio in precious metals; again diversified among gold and silver. I realize it is a long shot, but these are items that will retain value "no matter what."

Along with diversification, my other guiding principle is moderation...in everything (almost). But that is another topic...