An essential part of retirement planning is to diversify your portfolio. So any financial planner will tell you.
And this is excellent advice. When you diversify your assets into different funds, then if the value of one fund falls, the values of the other funds will generally remain stable or even go up.
However, there is a glaring problem with how most financial planners define the word “diversify.” Most believe that to diversify is to use the same investment vehicle, either spreading out the assets among different companies or depositing them in funds that contain different slightly differing asset classes – or funds that do both at the same time.
Namely, mutual funds.
Besides the fact that investing in mutual funds is more costly than other types of funds (such as index funds), they do not represent true diversity.
How can I say that? Back in 2008, when the stock market crashed, every single mutual fund investor – including my husband at the time because we didn’t know any better – lost over 30% of their investment asset value. Every. Single. One. Whether the mutual funds were domestic, or foreign, or small cap, or large cap, or included bonds, etc., etc.
It didn’t matter. The economy had no mercy on any kind of mutual fund. Why?
They are all based on the S&P 500. Where the stock market goes, there go mutual funds. While they are not as volatile as individual stocks – the main reason that financial planners push them – they are still too volatile for the average investor’s comfort.
If you know someone who panicked and took all their retirement money out of the market in 2008 or 2009, you know what I’m talking about.
Mutual funds are not truly diversified.
So what does a truly diversified portfolio look like, then? It will contain a variety of asset classes, not just assets based on the stock market. Following are a few examples of a diversified portfolio:
Example 1: 40% stocks (or mutual funds), 10% corporate bonds, 10% U.S. treasury bonds, 20% commodities, 20% annuities
Example 2: 5% money market, 5% certificates of deposit, 20% mutual funds, 30% annuities, 20% U.S Treasury bonds, 10% domestic index funds, 10% foreign index funds
Example 3: 10% money market, 20% gold, 10% other commodities, 10% Real Estate Investment Trust, 30% index funds (a variety), 20% Real Estate properties
How diverse is your portfolio?
If you have already begun your retirement planning, does your portfolio have that kind of diversity? If not, consider making some changes. This is the one area of life where you do not want to put all your eggs in one basket.
If you have not yet begun to invest for retirement, today is the day. And you want to work toward creating a truly diverse portfolio. This will not happen all at once, but with careful planning it should be in place within a few years.
If you’re interested in a truly diverse portfolio that has a great return yet is protected against the ups and downs of the market, don’t miss the next personal finance post coming up in about a week! If you don’t want to wait a week, buy my book, Hatching the Nest Egg: Achieve Super-Early Retirement Without Side-Gigs, Gambling, Or An Above-Average Income.