Portfolio Diversification Is Vital to a Successful Retirement Plan
By David Brooks, Founder & President of Retire SMART
Investors in the stock market will experience ups and downs. A properly diversified portfolio can help you smooth out the ride, especially as you transition from working life into retirement.
There is a common misconception that “diversification” means owning different types of stock. That is part of it, but true diversification is about more than owning different types of stocks. Even if you have a variety of stocks, they’re still stocks. They will react to positive or negative forces generally the same way as the entire stock market. Over the long haul they go up, but there are periods in which they go down, sometimes in large numbers.
In the two bear markets that occurred in the last two decades, most stocks experienced a retracement of more than 50%. The term “retracement” means the decline is probably temporary, and the stock will likely rebound, but that interim period can be painful. Managing it properly can make a big difference to the health of your portfolio, and thus the quality of your life in retirement.
The Russell 2000 is an index that, as its name suggests, measures the performance of 2,000 stocks – a much broader gauge than the Dow Jones Industrial Average (30 stocks) or the S&P 500. Recently, the Russell 2000 was down 30%. Many people didn’t realize how poorly the market was performing because a few high-performing stocks puffed up the averages of the Dow and the S&P 500, making it look like the whole market was doing great.
It’s understandable why people, especially the do-it-yourselfers who do not consult a financial professional, would think the status quo in the stock market is fine. The so-called Magnificent Seven has dominated the financial news. These tech stocks have soared and caused some to conclude that the entire market is up. That is not reality.
At Retire SMART, when we talk about diversification, we are not just talking about a variety of stocks within the equities market. We urge clients to diversify into other asset classes such as bonds (Treasury and corporate), real estate, commodities – things other than stocks.
Throwing darts at a wall map of investment options is not a diversification strategy. Nor is, for example, deciding to invest heavily in a gold IRA because a few celebrities say it’s the secret sauce for beating the system and guaranteeing the safety of your financial future. The decision to diversify requires careful research and analysis.
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And of course, you are welcome to explore diversification with us at Retire SMART. We offer what we call the “report card.” It’s a comprehensive evaluation of your portfolio. We utilize our SMART planning process and look at the full range of factors that can affect your retirement, such as medical expenses, risk levels in your investments, and tax traps into which people often unknowingly step in retirement.
But of course, the SMART process begins with analysis of your sources of income in retirement. This is where diversification becomes critical. If your income in retirement is dependent on one asset class, and for whatever reason that class takes a beating financially, that’s going to leave you in a world of hurt.
That’s not where we want our clients to be. We want our clients to have several classes of assets generating multiple streams of income. That way, if one dries up for a while, there are others flowing and keeping your quality of life in retirement at the level you deserve.
There’s nothing wrong with being a greeter at Walmart, but if you don that blue vest, we want you to do it because you want to, not because you must. Make sure you have a diversified and well-balanced portfolio that will allow you to enjoy your retirement.
