Having the right types of assets in your retirement account is just as important as making regular contributions. Diversifying your portfolio can help you weather the inevitable storms that will occur and save enough for a comfortable retirement.
What Diversification Means
Diversifying your portfolio means investing your money in a variety of assets. Those can include a mix of stocks, bonds, exchange-traded funds, index funds and other asset classes. Your retirement portfolio should include stocks for companies in a range of industries, businesses of varying sizes and companies that are based in different parts of the world. Diversification is not intended to produce quick results or large returns. It’s meant to limit the amount of risk you’re exposed to in the years leading up to retirement.
How Diversification Can Protect You From Financial Disaster
No one knows exactly what the future holds, but everyone knows that the stock market goes up and down, some companies perform well, and others don’t. Often, a business meets or exceeds expectations for several years, then begins to struggle. Some companies falter, then recover and perform better than ever, while others go out of business.
If you put all your retirement savings into one stock, and that company goes under, you can see your nest egg disappear. Diversification can help you avoid that kind of worst-case scenario. When a particular company or industry takes a hit, having a diversified portfolio can minimize the impact on your financial goals. Some of your other investments will most likely have positive returns. Those gains can offset your losses, and your portfolio can do well overall.
How Diversification Can Make Investing Less Stressful
Saving for retirement is a source of anxiety for many people. Diversification can give you peace of mind. Regardless of what’s happening in the economy, you’ll have a reasonable degree of protection against risk. Having a diversified portfolio doesn’t guarantee that you’ll have the amount you’re aiming for when you retire, but diversification can increase the likelihood that you’ll meet your goals.
How to Diversify Your Investments
There are many ways to diversify a portfolio. Your retirement plan most likely offers a variety of investments that you can choose from. You can review those options and select a combination of assets that will give you a diversified portfolio. If you have questions or need guidance, a financial planner can discuss your current investments, when you plan to retire, how much risk you’re comfortable with and how to diversify your portfolio.
