The Power of a Diversified Portfolio
By Ryan Payne, President
For anybody planning to retire in the near future, there are three chief challenges to keep in mind. First is inflation, because it’s all but certain that goods and services will cost more in the future. Second is longevity risk, since people are living longer and you could be retired for 25-30 years. Third are healthcare costs, which might exceed $200,000 during your retirement.
The greatest challenges to retirement are inflation, longevity risk, and healthcare costs
Your best protection against the vagaries of the market is a diversified portfolio
Investing in bonds is a vital component of disciplined asset allocation
So there are major expenses coming your way and I realize many investors are caught between a rock and a hard place. Your assets need to grow over time to keep up with inflation, longevity risk, and healthcare costs. When investors have significant money sitting in cash and earning 0%, it’s actually losing value because inflation has averaged 3% a year since World War II. On the flip side, money you have in the market has most likely experienced tremendous volatility over the past couple months.
So the natural question is where do you go from here? The answer is a diversified portfolio. That means not having too much money in stocks because you’d be in trouble during periods like this. Especially if you need to start pulling from a portfolio that has suddenly lost 15-20 percent in value since peaking last summer. On the other hand, if your money has just been sitting in cash for the past 5-6 years, it earned nothing while the market soared to meteoric heights.
One fundamental way to create a diversified portfolio is by including bonds. Not the kind you buy on the retail desk and not a bond fund, but rather high-quality portfolio bonds that are institutionally managed, pay interest and come due. While the market has been selling off right now, bond portfolios like these have actually risen in value.
Having a targeted bond allocation within your portfolio offers several distinct advantages: First, protection for your portfolio. Second, the ability to pull from that bond portfolio if the market is down. Third, strategic buying opportunities since the best time to add stocks is actually during a market decline.
So disciplined asset allocation will enable your portfolio to grow over time with less risk. It also prepares you to fight against inflation, longevity risk and healthcare costs – your greatest enemies in that journey of retirement.
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