The past years have really been very trying for many. Recent events have only helped to create an aura of increased uncertainty. Many retirees as well as soon to be retirees are especially concerned since they are, or soon will be, counting on their investment portfolios for additional income. If you are in this situation you may want to ask yourself the following question, are my investments diversified enough to withstand changes in the market conditions?
In order to protect yourself from market volatility, you must have adequate diversification within your investment portfolio. A portfolio that is overly concentrated in one company, one sector (the financial sector or healthcare sector, for example), or investment type (fixed income or stock investments) will not provide the level of risk protection you should have. While it is important to have exposure to the stock market during retirement, many retirees have an over exposure to the stock market because they continue to hold too much of their company’s stock. Having a carefully thought out asset allocation that includes bonds and cash equivalent securities, as well as stocks and alternatives is extremely important. You need to determine the level of risk you are willing to incur.
It is also important to diversify within each asset class in your stock portfolio. For example, instead of including only large-cap stocks or stocks funds in your portfolio, you also might want to have some exposure to the small-and mid cap segments of the market. Similarly, bond investments might be diversified among different issuers (e.g., government and corporate issuers), tax-free versus taxable and laddered maturities. Remember when constructing your fixed income portfolio and determining whether you should be in taxable or non-taxable bonds you want to be sure you invest in bonds that will put more income in your pocket after taxes. In other words, since tax-free bonds usually pay a lower interest rate than taxable bonds you want to be sure you are in the right tax bracket in order to take advantage of the difference.
Investors who take the time to review their portfolio holdings in detail often find they are concentrating on one investment type at the expense of others that may deserve a second look.
If you are currently retired or plan to retire soon, you need to develop an appropriate investment strategy. You need to seek unbiased, reliable, and personal assistance. Given the volatile financial times we are living in, it is more important than ever to be sure that your investments will serve your needs today as well as tomorrow.