I am sure you have heard the term “Don’t put all your eggs in one basket”. Usually when people say this, they are typically referring to a job (or a person). However, the same advice can be applied to investment portfolios.
Everyone needs diversification in their portfolio.
E V E R Y O N E.
The good thing about getting diversification is that it’s not as difficult as you think. Several small, yet effective, steps can actually help you to lower your risk of exposure.
Before hopping into the ways to diversify your retirement portfolio, let’s have a quick look at what diversification even is.
What is diversification?
In finance, diversification refers to dividing all your capital in such a way that lowers risk exposure. The main purpose of diversification is to return the maximum profit collected from different areas.
According to the financial experts, diversification doesn’t guarantee that you won’t see a loss. What it aims to do is help you to reach your financial goals while reducing your risk exposure.
Initially, it may seem expensive and complicated to diversify your retirement portfolio, but it does not have to be.
Examples of a diversified investment
An example of a simple diversified investment account would be a three fund portfolio. The most popular 3 fund portfolio is one recommended by Jack Bogle, founder of Vanguard. It consisted of the following:
- A domestic stock “total market” index fund
- An international stock “total market” index fund
- A bond “total market” index fund
The three fund portfolio is a popular option for a lot of people because it exposes them to several market types. Just think if one sector isn’t performing so well, you still have assets in another sector that is hopefully experiencing the opposite.
What are some ways to diversify your investments?
1. Make sure that Your portfolio has A Mix Of investments
Mutual funds and index funds
Your workplace retirement account provides a simple way to get started investing. When you purchase mutual funds and index funds it ensures instant diversification. Both these funds are excellent options to diversify your retirement portfolio with little hassle. This is because index funds inherently have a lot of diversity.
For example, if you choose to invest in the S&P 500, you are investing in the top 500 large companies listed on the US stock exchange. If you choose to invest in a technology index, you are also being exposed to several different types of companies.
Bonds
Bonds, though less volatile than stocks, provide regular interest income. They are often referred to as a barrier against the sudden fluctuations in the stock market. If you are more concerned about safety than growth, you should consider buying high-quality bonds. Unlike stocks, bonds don’t offer high returns. However, they do offer stability. Usually when stocks are experiencing a dip, bonds tend to be experiencing the opposite effect.
Having some bonds within your investment portfolio helps to add in some diversification.
Stocks
Individual stocks are the most volatile part of any portfolio. Again, this is because stocks typically mean a higher growth rate. Because of the increased growth rate, you will also have to deal with greater risks. For example, if you happen to choose a bunch of dud stocks, then your investment may quickly become worthless.
When you are adding in stocks to your portfolio, make sure it is an overall percentage that can still allow you to sleep easy at night. Most long term investors, depending on their goals, tend to keep between 5-10% of their total portfolio in single stocks.
2. Consider Alternative AssetS
REal Estate
Having some property in your investment portfolio is a great way to diversify! Owning real estate has many perks, the biggest one in my opinion, being that it is a physical asset.
Think about it, once that home is paid off, a majority of the rental income becomes added cash into your pockets.
If you have no desire to be a landlord, there is still another option. You can purchase REITS as a way to be in real estate without having to be a landlord.
Cryptocurrency
Are you trying to diversify your retirement portfolio? Crypto may be the way to go! In simple terms, cryptocurrency, is currency that takes the form of tokens or “coins”. Cryptocurrency exists on a distributed and decentralized ledger that miners are able to access.
Crypto is becoming increasing popular because of it’s limited availability as well as transparency. Consider adding a bit of crypto as a means of diversification.
3. Regularly rebalance your portfolio
The professionals believe that one must rebalance the portfolio on a regular basis. Many people choose to rebalance quarterly or annually. Some even go as far as rebalancing monthly. For rebalancing, you must reallocate the funds and to your desired allocations. This can be as simple as buying more of a particular asset class.
For the regular maintenance of your portfolio, you can either:
- Use a Robo advisor
- Use Your Own Spreadsheet
Final verdict
As you approach retirement, you must prepare your portfolio to produce the maximum income. Diversification protects you by reducing your risk exposure. The worst thing that could happen is to have all your assets into one thing and watch that thing go under.
This would be especially bad in your retirement years. So get up and get diversified.