Current Pension Topics
Diversify Your Investments

By JOEL L. FRANK

Reminder: Are you sorry you did not contribute more to your 457(b)/401(k) account for 2006? The door remains open. You still have an opportunity to contribute to a pre-tax account for 2006. How? Just open up a New York City Employee Individual Retirement Account (NYCE IRA) with the Deferred Compensation Plan of the City of New York.

Mr. Frank is a fee-only Retirement Financial Planner. He can be reached by telephone at (732) 536-9472, or via e-mail at rollover@optonline.net.

The investment must be credited to the account by April 17, 2007. Do it now! Additionally, if your spouse has not taken full advantage of pre-tax savings plans that were available to him/her during 2006, he/she may also open up his or her own NYCE IRA with the City's Deferred Compensation Plan. Your spouse can open up his or her own IRA even if you decide not to. Note: The NYCE IRA is available to former as well as current city employees. For additional information go to: nyc.gov/nyceira or call (212) 306-7760.

I have been receiving a lot of inquires about investment diversification. Everyone, in their own best interests, must practice investment diversification. Why? To protect oneself from a massive decline in common stock values. For example: During the first 38 months of this century, the Standard & Poor's 500 Index lost 49 percent of its value. This means that if you had a dollar in this all-equities fund on Jan. 1, 2000 it was worth 51 cents on Feb. 28, 2003. If, however, you also had a dollar in a stable value fund, you saw that investment grow over the same 38 months to about $1.15. So your total investment ($2.00) was worth about $1.66 ($0.51 plus $1.15) on February 28, 2003. The loss on the $2.00 investment was 17 percent. By splitting equally your investment between equities and stable value, your loss was reduced by 65 percent (49 percent minus 17 percent equals 32 percent, 32 percent divided by 49 percent equals 65 percent). No one should have an all-equities portfolio!

Having said that, a common question asked is, to achieve the proper investment diversification should I use the Pre-Arranged Portfolios (Target Date Funds) or design my own diversification scheme by investing directly in all or some of the Core investment choices?

I strongly recommend that everyone should invest all of their money in the appropriate Pre-Arranged Portfolio and not invest at all in any of the Core funds. But please diversify by either placing all of your money in one of the Pre-Arranged Portfolios (just one) or by diversifying your investment among the Core investment choices. Please do not do both because each of the 9 Pre-Arranged Portfolios are made up of the Core investment funds. You are, therefore, defeating the purpose of investing in a Pre-Arranged Portfolio if you are also investing at the same time in any one or more of the seven Core funds.

An example should knock this point home: Assume one invests a dollar in the 2045 Fund and a dollar in the Stable Value Fund. The composition of this person's $2.00 portfolio is: $0.90 in equities and $1.10 in fixed income, or 45 percent in equities and 55 percent in fixed income. This is drastically different from the 90 percent/10 percent split in favor of equities that comprises the 2045 Fund.

The 2045 Fund should be used by one who is about 38 years from the year he/she expects to begin withdrawals from the plan. This person should also be comfortable with investing in equities for the long term. This person also recognizes that because he has elected the 2045 fund, he has many years to recover from stock market declines, and this person also recognizes that he will be contributing to the 2045 Fund for many, many years to come. This person also recognizes that over the next 38 years the 2045 Fund will gradually reduce its 90 percent exposure to equities and that in approximately 38 years the 2045 Fund will become the Target Fund, with 20 percent in equities and 80 percent in fixed income.