How diversified are your retirement savings?

I knew I was perhaps too concentrated in Washington Post stock (about 17 percent) and maybe a little light when it came to bonds (4 percent), but I figured I was pretty well off when it came to the rest of my stock investments. After all, I had investments in four stock mutual funds.

That was before I looked closer. Two stock mutual funds accounted for most of my holdings, and it turned out they had a lot in common. Two of their top five holdings were identical: Citigroup and Bank of America made up more than 4 percent of the holdings of one mutual fund and more than 8 percent of the holdings of another.

Maybe not as diversified as I thought.

And it turns out I'm not alone. Most of us are not as diversified as we should be when it comes to retirement investments. At its simplest, diversification means investing in different types of assets.

When it comes to retirement savings, the choices are basically stocks, bonds, and cash and cash equivalents, such as savings accounts, certificates of deposit and money-market funds. Put all your money in a single stock, and you may be exposed to more risk than you realize -- as employees at Enron and WorldCom learned, to their sorrow. At the other extreme, invest completely in safer but lower-yielding investments, and you may be earning less than with a more diversified portfolio.

But you also need to spread your risks within each asset category. That's why so many investors choose mutual funds, which allow them to own a small portion of a large number of investments. But buying more than one mutual fund may not add much to the diversity of your investments if the funds are investing in the same companies. And sometimes they are, as I found.

Edwin J. Elton and Martin J. Gruber, Nomura professors of finance at the Stern School of Business at New York University, have spent a lot of time looking at why this is so. One reason, according to Elton, is that there isn't much diversity among the choices employees are offered in their 401(k) plans. Many companies rely on mutual funds from a single family of funds, and they often offer more than one fund with similar stock-picking outlooks -- for instance, choosing companies with strong earnings and revenue growth. In some cases, the overlap in stock holdings within a fund family is as much as 34 percent of total net assets, they found.

One reason is that different fund managers within the same family (Fidelity, Vanguard, T. Rowe Price, etc.) are often looking at the same economic forecasts and analyst research when they're choosing stocks.

The other reason investors may be less than ideally diversified is their own behavior, Elton said. "They tend to chase performance. They tend to overinvest in their own company's stock. They tend not to rebalance." Rebalancing is adjusting your holdings to keep the mix of investments you choose -- say 75 percent stocks and 25 percent bonds -- if a soaring stock market shifts that balance.

Barry Glassman of Cassaday, a financial planning firm in McLean, said many investors look at performance over recent years in choosing their funds. The problem is that performance may be cyclical.

"If you picked the top performers at the peak of the market in 1999, you really regretted it for the following six years," he said. "If you pick the best performers today, who knows where the future will go." Investors should look beyond the numbers to see what the funds own and what their philosophies are, he said.

And in an ideal world, they probably would. But a recent study by the Center for Retirement Research at Boston College suggests that many 401(k) participants aren't even spreading their investments among asset types. The researchers found that about half of 401(k) participants "do not follow the prudent investment strategy of diversifying their holdings." In fact, looking at holdings in 2005, they found that 33.3 percent of 401(k) participants had no stock holdings at all, while 15.8 percent had almost all their investments (90 to 100 percent) in stocks. That would include me.

The risk to those who stick all their savings in money-market funds or fixed-income funds is lower returns than those typically earned by investing in stocks. "The pile doesn't grow very fast," said Alicia H. Munnell, director of the Boston College center. The risk for those with nothing but stocks is that a couple of bad years in the market close to retirement might put retirement plans on hold.

"I think all this stems from a fundamental problem, which is that we Americans are not very sophisticated in financial terms," Munnell said. "People are clueless. We're just so uninformed in terms of financial instruments and the advantages and disadvantages of all this stuff."

That's a problem that was addressed in last year's Pension Protection Act, which gave employers more comfort if they directed employee savings into default investments such as balanced funds or life-cycle funds, a mix of investments designed to buy the best of both worlds in terms of protecting savings and maximizing investment returns.

Munnell said she doesn't want to sound anti-education, but making things easy and automatic will probably do more good than efforts to make everyone a savvy investor. "I think life-cycle funds are going to be the answer," she said. "I don't think getting people to understand the nature of different types of investment is going to happen."

I'm interested in hearing what you've learned from your or your parents' experiences with retirement that could help those who aren't there yet. Please let me know if I may use your name in the column, and e-mail me at