Many 401(k) investors treat picking 401(k) mutual funds.
And diversification like the same thing.
They’re related.
They’re not interchangeable.
And each one can affect 401(k) stock market risk.
When you spread your 401(k) money across several mutual funds.
It looks diversified.
If you own enough different mutual funds you feel diversified.
Everyone knows not to “put all your eggs in one basket.”
Here’s the thing to remember:
Diversification answers how your 401(k) mutual funds relate to each other.
But your individual mutual fund is where 401(k) risk lives.
You can be well diversified in your 401(k).
And still be taking more stock market risk than you intended.
Stock market risk isn’t about the number of 401(k) mutual funds you hold.
It’s all about what individual mutual funds you hold.
Diversification protects your 401(k) principal a little bit.
Your individual mutual fund picks protect your 401(k) even more.
Stop asking, “Do I have enough 401(k) mutual funds?”
And start asking, “What is the risk of the 401(k) mutual funds I own?”
Here’s a more practical way to think about diversification.
You don’t need to own more 401(k) mutual funds.
You need to manage the stock market risk in the ones you own.
And that gets back to picking the right 401(k) mutual funds to begin with.
Do you feel unsure about your 401(k) mutual fund risk levels now?
If so, let’s get a connection here and I can share information.
P.S. More 401(k) mutual funds often increases stock market risk.
