How to Diversify Your Retirement Portfolio

Diversifying your retirement portfolio can help increase the stability of your investments and help you avoid large losses.

Including a mix of investment products as part of a pre-retirement accumulation strategy is usually a good idea to avoid putting all your eggs in one basket. These can include mutual funds, stocks, bonds, and real estate. In general, adding fixed annuities to your plan can add a level of stability and guarantee lifetime income as well.

It should be an important part of your retirement checklist to diversify investments because no single investment always performs well enough to help you meet your income goals in retirement.

Imagine if you put all of the money in a single stock that constantly wavered from gains to losses and back. Or conversely, if you had every penny of your money in a bank savings account earning less than 1% per year?

Neither is a good retirement planning strategy and would likely lead to a lot of sleepless nights.

The benefit of a diversified portfolio is that it helps you take advantage of each asset class, so when the economy ebbs and flows, your returns over time are fairly consistent.

What is a Diversified Retirement Portfolio?

Diversification is an investment concept that promotes the spreading of your investments over various types of assets.

In doing so, you increase the likelihood that there will be a balance of gains and losses where some of your investments do well while others don’t. The overriding theme in diversification is mitigating risk while maximizing opportunity.

Why Diversification is Important in a Retirement Portfolio

Diversification is important because it helps reduce volatility in your retirement holdings by spreading your money across asset classes, geography, and industries. This reduces the risk of consistent losses, which can have an impact on the amount of money you have for a comfortable retirement.

Let's do a deeper dive into the benefits of diversification and the products that might make sense in a well-diversified retirement portfolio. We will also cover the concept of rebalancing, where you make regular adjustments to your investment mix to ensure you're still hitting your target returns over time.

Types of Assets to Consider for Diversification

There are categories of investments that represent the types of retirement products that are available to purchase for your retirement portfolio. Here are a few to consider.

Cash and “Cash Equivalents”

They say that cash is king, but holding too much cash may not be the best decision for your portfolio and retirement goals.

People like cash because it feels safe. It's in your pocket. When you leave in the morning with $40 in your pocket, you come home with $40 (if you didn't buy gum!).

However, over the long term, it may be safe, but having lots of cash sitting idle is not contributing to a comfortable retirement.

Having cash as part of your asset allocation strategy is still an important consideration because it is the most liquid of all investment classes. In addition to actual currency, cash can also include cash equivalents like money market funds and savings accounts that offer liquidity and small interest rate return.

Equities

Equities can include the direct purchase of shares of stock in companies or through a stock mutual fund or exchange-traded fund (ETF) that represents a mix of stocks by type of industry or investment goal (like dividend ETFs).

When you buy stocks, you take on an ownership stake in those businesses. Equities generally offer the highest potential for high returns. For instance, the average stock market return has been about 10% per year for nearly the last century, as measured by the S&P 500 index, but the annual returns can vary wildly.

If you have a long time horizon before retirement, equities or equity funds can be a solid choice as part of your investment strategy.

Fixed Income

Fixed income, as the name suggests, is an asset that provides you with fixed growth, or income, over time. It is a lower risk component of your investment portfolio focused on producing cash flow and preserving capital.

Deploying this strategy can be a beneficial hedge against the variable returns of the stock market. The asset class of fixed income includes assets such as bonds, annuities, and CDs.

Deciding on what types of fixed income you should own depends on factors like your age and risk tolerance. Fixed annuities are part of this asset class. Whether you are accumulating money prior to retirement or creating guaranteed lifetime income in retirement, fixed annuities could have an important place in your portfolio.

Real Estate

Real estate can include your primary residence or investment properties, commercial real estate, and real estate investment trust (REITs) investments.

Real estate investments historically grow slowly over time, so this asset class may perform well during inflationary periods that are usually more punishing to other asset classes.

Precious Metals

Precious metals like gold and silver (or funds that represent these entities) can provide a hedge in times of economic uncertainty. This asset class may perform well in economic climates that are unfavorable to more risky asset classes like stocks.

Why Consider Adding an Annuity to Your Retirement Portfolio?

If one of your investment objectives is ensuring steady levels of growth and the elimination of downside risk, then fixed annuities may be a good addition to a well-diversified portfolio.

In addition to guaranteed growth and attractive rates of return vs. other low-risk products like bank savings accounts, annuities are the only product that can guarantee income in retirement.

Strategies for Diversifying Your Portfolio

Investment professionals often use one or more of the following strategies when helping you build a retirement income strategy.

Dollar Cost Averaging

With dollar-cost averaging, you invest your money in equal portions over time, regardless of stock market conditions.

Dollar-cost averaging is a specific discipline of investing that removes emotion from the equation. It directs you (or your advisor) to avoid the temptation to time the market.

Rebalancing

Rebalancing is a strategy that advocates making frequent adjustments to the assets in your portfolio based on factors such as age and changes in risk tolerance. You and your advisor may consider rebalancing your portfolio regularly, at least annually.

Review

Perseverating on one investment, or category of investments, is not a tried and true strategy for growing money before retirement or enjoying money once you are retired.

Each asset class has different characteristics and tends to perform differently depending on economic factors, so spreading your investments across multiple asset classes can help mitigate your overall risk. Diversification helps smooth the ebbs and flows of your portfolio over time.

Fixed annuities can be an important part of this puzzle because they are a true guaranteed part of your pre- and post-retirement strategy. Canvas Annuity offers fixed annuities that you can purchase online in minutes with rates that are among the most competitive in the country.

Finally, it is crucial to consult a financial advisor before making any investment decisions to ensure that they align with your overall financial goals and risk tolerance.