boy making choice deciding on best option

Many investors understand that diversification is important. For example, you wouldn’t want to have all small-cap stocks or only bonds in your 401(k) account.

But an important part of diversification that a lot of people miss is their overall household allocation, which is the grand total of all assets.

A sound investment plan needs to consider not just your 401(k), but also your partner’s 401(k) as well as any other assets that you both are holding for retirement.

A joint future requires joint planning.

As an example, let’s say your 401(k) account is properly diversified to fit your risk level and time horizon. But what if your partner’s 401(k) account is invested mostly in high-risk stocks? This may be fine if your partner is younger than you, but maybe not so much if you’re of similar ages. Look at both of your 401(k)s together and see if the combined allocation of both accounts fits your household risk level and time horizon — not just each individual’s. One of you may need to adjust the assets you’re holding in your 401(k) so that together, your collective 401(k) accounts are in line with the mix you’re looking to hold.

Similarly, if either of you have an Individual Retirement Account or additional 401(k) accounts with a former employer, you should look at these investments together with your current 401(k) accounts to make sure your combined investment mix is on track with your goals.

Taking stock of your overall portfolio.

What about assets outside of your 401(k)s? Let’s say you own some relatively high-risk company stock. You and your partner need to take this into consideration when deciding what to hold in your 401(k) accounts. The 401(k) accounts themselves may have just the right amount of stocks, but when you add this outside company stock into the mix, it likely throws the household allocation off. You may want to reduce the amount of company stock you’re holding or adjust your 401(k) to get your overall ratios back in balance.

Brokerage accounts are another common outside investment. If you have one of these accounts, what types of assets are you investing in? If you’re heavily into large-cap stocks, for example, take a look at how many large caps you have in your 401(k). It’s easy to unwittingly invest more in a single category than you intended if you hold a lot of individual stocks as well as mutual funds. You may need to re-adjust your 401(k), brokerage account or both to get to the level of overall diversification you want.

Beyond stocks and bonds.

Real estate is another consideration. If you own property other than your primary home, you may want to be cautious about including other real-estate investments such as Real Estate Investment Trusts (REITs) in your 401(k) or brokerage accounts. The rationale behind this is the same as why you don’t want to hold too much of any other asset — REITs and real estate respond similarly to market activity and holding too much of both at the same time is unnecessarily risky.

The bottom line is that you shouldn’t just look at your 401(k) to decide whether you’re diversified in the way you want to be. Your overall household allocation is key and should be what drives your investing decisions, not any individual account.


This post is based on Chapter 8 from the book, The Intelligent Portfolio, by Christopher Jones, Financial Engines’ chief investment officer. The content has been revised for the purposes of this blog.