Although most people spend years saving up funds for their retirement, in this day and age, relying solely on cash savings can be stressful and ill-advised. However, choosing to invest years of savings seems even more of a risk. Therefore, it is crucial to the livelihood of those retiring to find a way to balance the risk between the two to determine a successful retirement strategy.
Those who have experience with investing have probably already heard of a diversified portfolio. For those new to the concept, diversifying a portfolio is simply the practice of spreading investments around so that there are multiple investment/asset types in the portfolio. Diversifying your portfolio can be the saving grace for finances. Look at this example: Let’s say a person has $200,000 in their portfolio, but all of the assets are real estate. Then, let’s say that the housing market crashes. With no diversity and only one kind of investment, this investor risks losing their assets and their money.
With a diversified portfolio, assets and investments don’t correlate to each other. So when the value of one falls, the other rises, rather than all costs decreasing. This diminishes risk overall and helps ensure a stronger investment portfolio.
So how does one go about diversifying their portfolio? Here are different asset classes that can be used to diversify portfolios and ensure a happier, more relaxed retirement.
Most investors don’t count equity in a home as an asset because most people buy houses to live there permanently. However, home equity can be tapped into, providing a source of income in tight spots.
Out of all of the investment asset types, stocks are the ones people hear about the most. Whether it be movies or wall street, people know that stocks are required for a diversified portfolio. However, it is essential to incorporate diversity within stocks as well. Stocks should be purchased from all different size companies: small-cap, mid-cap, and large-cap.
International stocks can generate a higher return, typically due to emerging markets, meaning that portfolios can reach greater diversification overseas. On the other hand, though, these investments are riskier since many emerging market countries do not have central bank safeguards yet in place.
*This information is not to be used as professional financial advice. Contact Mark Kemp at Kemp Financial Services for professional insight.