“Never put your eggs in one basket”

-Your Mother

Exhibiting intelligent caution is highly important in retirement planning.  Think about dropping the proverbial basket and finding that all of your eggs have shattered to the ground – leaving you nothing to eat.  In retirement planning, you need to diversify your asset allocation not only to prevent a devastating loss from one catalyst, but also to capture the full power of investment returns.  Remember, the only quantitative way to reduce your risk in investing is through proper diversification.  

In retirement planning, the two main things to consider when diversifying your portfolio are your timeline and your risk tolerance. 

Analyze Your Timeline

How long will it be before you access your retirement accounts?  5 years?  30 years?  Your retirement planning timeline will be one of the main factors in determining how you achieve your financial goals.  A shorter timeline, such as 5 to 10 years, will probably result in investment choices that are more conservative, geared towards protecting your wealth.  A longer timeline, by contrast, allows an individual to take riskier investments, which may bring higher returns, but also allows enough time to recover from any losses incurred.

Evaluate Your Personal Risk Tolerance

Your risk tolerance will also heavily factor in how you diversify your retirement portfolio.  A high tolerance allows an individual to diversify in a greater amount of risky investments that could result in higher returns, but also higher losses.  If you are more interested in protecting your wealth, you will probably have a lower risk tolerance and keep your asset allocations in safer investments.  However, it is important to remember the risk-to-reward ratio in retirement planning.  The more tolerant you are of risk, the more financial reward you could enjoy.

Diversification Options

In retirement planning, where do you diversify?  While your retirement planning professional may create a unique mixture for your specific situation and retirement goals, there are four main investment options that most retirement accounts have:

·        Cash Equivalent – Certificates of Deposit or money market accounts are very liquid investments.  These are low risk and offer the least amount of interest return.

·        Bonds – Corporate or government investment bonds offer a modest return without the heavier risk felt by stock investments.  Investment bonds are less volatile and provide a fairly safe investment for low-risk individuals. 

·        Mutual Funds – Investing in mutual funds gives the investor a “share” in an already diversified fund.  In retirement planning, there are many mutual funds available for investment, and all have their own risk factors from high to moderate to low risk.  Mutual funds can offer the investor a way to diversify in stocks, while allowing the fund managers to do all the research and hard work.

·        Stocks – Investing in stocks can require tremendous effort in researching and monitoring companies.  Most people entrust their retirement accounts with a stockbroker who performs investment research and makes recommendations.  For retirement planning purposes, stocks can offer the greatest reward and return with the right company, but also has the greatest risk factor due to high volatility in the stock market.

Use the power of time and risk tolerance to help you decide how to diversify your retirement account portfolio.  Enlist the help of retirement asset management firms to help you make the financial goals and decisions best for your situation.  Remember, in retirement planning, your financial goals are only limited by your risk tolerance.  And a more diversified retirement portfolio allows you to make some risky but rewarding investments, as well as safe returns for your money.