Why your Retirement Portfolio must be Diversified
When a retirement portfolio is diversified, it simply means that your investments have been set up in multiple places to help minimize the risk of losing everything you have. This means that if one of your investments experiences a loss, you’ll still have the rest of your portfolio to fall back on – while still earning reasonable profit on the rest. While it can be challenging to correctly diversify your portfolio, it’s a crucial part of planning a successful retirement.
The Main Aim of Diversifying a Portfolio
Although a number of individuals think that diversification is necessary to maximize their return on investment, the truth is that the main reason why it must be done is to limit the impact that a volatile market may have on a portfolio. For instance, if an entire investment is placed in bonds, a large enough return may not be possible to support a retiree’s lifestyle. Alternatively, if everything is invested in domestic stock, the stock market’s volatility could cause the loss of a large part of your nest egg.
Limit your Losses
When investing for retirement, your main goal should be to keep abreast of market averages and ensure that you’ll end up with enough money available after you stop working. It will not only be necessary to focus on your gains; you’ll need to keep in mind that there’s always the possibility that losses will be experienced – a large loss can totally derail your retirement plans. As such, the more diversified your portfolio is, the less chance you’ll have of experiencing big losses.
Less Overall Risk
Some individuals show interest in investing in high risk places that can provide significant returns, but it’s important to keep in mind that equally large amounts of money can easily be lost this way as well. While it can be fun to watch your money grow at a quicker than average rate, it’s recommended that some of your funds be placed into safe investment options like an IRA or bonds. Doing this will allow you to take a chance or two, but not at the risk of losing everything.
Keeping you on Track
Another aspect that’s essential when diversifying a portfolio is rebalancing. This refers to the practice of allocating money between various types of stock to find the right balance between risk and investing conservatively. For example, you might choose to spend a quarter of your stock investment budget on real estate, 5% on foreign stocks etc. Thereafter, you go back once a year to see how your balance has performed – and speak with a financial advisor if any changes need to be made.
Ensuring that you have a diversified retirement portfolio won’t only help you get the best possible return on investment; it will also prevent you from losing too much money if a portion of your investment experiences a loss. If you are keen to discuss your retirement portfolio with a professional advisor, call us to set up an appointment today.