Retirement Diversification
Diversify Your Investment Mix
What's your favorite food? Steak? Sushi? Pasta? Fajitas? Whatever it is, eating only one food-no matter how much you like it-is not good for your health. We need to eat a variety of foods to stay healthy
The same applies to your approach to investing. While every investment involves some degree of risk, spreading your savings among a variety of investments can help reduce your investment risk and keep your retirement portfolio healthy.
Why Diversify
Diversification is useful because investment returns can be higher, lower, or even negative based on changing economic conditions-conditions which are difficult, if not impossible, to predict. While diversification can't guarantee you a profit or protect you against a loss, it can help you capture the gains of investments that are currently doing well, while reducing the impact of investments that are losing money.
When we talk about diversification, we mean investing in different asset classes such as stocks, bonds, and cash equivalents. Note, too, that each of these assets can be further sub-divided. For example, stocks can be classified as small-cap, mid-cap, or large-cap depending on the size of the company. And sometimes they are further labeled by their growth orientation (value vs. growth). While stocks historically have offered greater return opportunities, they also have the greatest risk and volatility. Bonds have traditionally offered smaller returns than stocks over time, but less risk and volatility.
Balancing Investment Choices and Risk Preferences
When deciding on an investment mix for your retirement savings, you need to strike a balance between your risk tolerance and your investment preference. If you're looking to emphasize opportunities and growth, you may be comfortable with an investment strategy featuring heavy exposure to stocks, but less exposure to bonds. On the other hand, if your primary goal is the protection of your principal, you may be willing to accept lower returns in exchange for the added stability of a portfolio with sizable bond allocations. But growth and stability don't have to be mutually exclusive: a properly structured investment portfolio could allow you to enjoy the benefits of both.
The key to a diversified portfolio is to identify investments in segments of each asset category that may perform differently under different market conditions. Your employer's retirement savings plan offers you a diverse array of investment choices and the benefits of professional managed funds. The range of funds is geared to help make it easier for you to maintain a diversified investment portfolio. Your financial professional is also available to help you chose an investment mix that fits your needs and risk preferences.
