Mistake number two is failing to diversify your investment portfolio. Many retirees have a collection of mutual funds and ETFs, but often, the investment styles within these funds are similar. This lack of diversification can lead to the entire portfolio rising or falling all at once.
To achieve proper diversification, your portfolio should include exposure to various asset classes, such as large, mid, and small-cap stocks in the US, international markets (developed and emerging), real estate, and fixed income. It’s not just about having one investment in each category; it’s about having a mix within each category.
Think of it like holding one pencil versus holding a bundle of 300 pencils with a rubber band – the latter is much more resilient. Whether you’re accumulating wealth, nearing retirement, or already retired, diversification is vital to increase your chances of withdrawing funds at a gain. Having a variety of assets to choose from is essential during the distribution phase, reducing the risk associated with concentrated positions.
So mistake number two is failing to diversify. Oftentimes whenever we’re sitting down with a new client, and particularly with retiree clients, we see that maybe they own an assortment of mutual funds and ETFs.
But the investment style within each of those funds is very similar. This causes the entire portfolio to either go up all at once or down all at once. So it’s very important that we have exposure to multiple asset classes to properly diversify.
So what this chart is showing is all the different asset classes that you can invest in. As you can see, we have large mid and small cap in the US. And then internationally we have developed markets, emerging markets, and then also real estate and fixed income.
In order to have a properly diversified portfolio, we need to have exposure to each of these blocks and not only have one investment inside of each of these, but have many, many within. One good example of this would be thinking of holding up a single pencil, very easy to snap in half, versus if we have a rubber band wrapped around, say, 300 pencils, it would be nearly impossible.
So very important, whether you’re in the accumulation phase or just nearing retirement or you’re already retired, to have a properly diversified portfolio to greatly increase your odds of pulling out at a gain.
Whenever you have concentrated position, whether that’s in one fund or one asset class, like, say, the US. Large cap us. Stock market in general, whenever you’re distributing funds, it’s very important that we have an assortment to pick, choose from.