Diversification used to be very easy. A typical portfolio included stocks, bonds, and cash.
However, this type of traditional diversification has proven less effective in recent years as market volatility has increased. It is important to ensure that your portfolio is designed to succeed in favorable market conditions and withstand adverse market conditions.
We spend our lives saving and saving for retirement. Many people are doing well with diversification and are probably seeing their investments grow. But as you approach retirement, your priorities start to change. Sure, we still want our money to grow and stay ahead of inflation. But now protecting what we have accumulated and generating income from it has become a top priority.
Sign up for Kiplinger’s free e-newsletter
Profit and prosper with the best expert advice on investing, taxes, retirement, personal finance and more straight to your email.
Profit and prosper with the best expert advice straight to your email.
Reduce risk and maximize your time
A major risk faced by retirees is that the market will fall sharply at the same time as they withdraw their “retirement funds.” If this happens, not only will your account value decrease due to poor performance, but it will also decrease further due to withdrawals. If the withdrawn money is permanently gone, your profits will be suppressed when the remaining account balance could be restored.
Unfortunately, there is no Swiss Army knife of investments that can grow your money, protect you from recessions, and generate a steady income all at the same time. Instead, to navigate this delicate situation, it is wise to divide your assets into several baskets, each with a specific time frame and corresponding risk profile.
Compartmentalization is key. Can be layered with fixed income sources such as Social Security, pensions, and annuities to fill a basket designed for current income, short-term conservative investments, and a more balanced growth approach over the long term . Today’s basket separates your current income needs. This gives you time to potentially grow so that future baskets are ready when you need them.
Here’s a framework for four segment strategies to reduce the risk of poor market timing:
- lifetime income. Financial sources such as social security, pensions, and pensions form the “income floor.”
- Fixed income. This segment, located at the top of the “revenue floor”, has been carefully crafted to decline gradually over a 3-5 year span. Its investments are usually biased towards the safe side, including guaranteed options.
- Balanced. Balanced segments, which act as a bridge between revenue and growth factors, typically have a time horizon of 5 to 10 years. Operating as a dual power engine, the profits generated from this category are likely to supplement the income needs arising from the fixed income segment.
- long term growth. The funds allocated to this basket are designed for growth trajectories over 10 years and are intended to benefit from continued investment through multiple market cycles. This category may also include unconventional investment types.
Lack of a clear strategy for (unnecessarily) generating monthly retirement savings creates great uncertainty and anxiety. However, implementing a time-shared retirement income plan establishes a comprehensive strategy for choosing the right investments for your inflation-adjusted income needs over multiple years. By taking a strategically oriented approach, individuals can move into retirement with confidence.
Dan Dunkin contributed to this article.
The Kiplinger appearance was obtained through a public relations program. The columnist received assistance from a public relations firm in preparing this article for publication on Kiplinger.com. No compensation was made to Mr. Kiplinger.
Securities offered through LPL Financial, member FINRA/SIPC. Investment advice is provided through his Bleakley Financial Group, a registered investment advisor. Amwell Ridge Wealth Management operates an advisory business under the name “doing business as” (d/b/a). However, Bleakley Financial does not believe that it conducts advisory activities through Amwell Ridge Wealth Management. Bleakley Financial Group and Amwell Ridge Wealth Management are separate entities from LPL Financial.
The opinions expressed in this material are for general information only and are not intended to provide specific advice or recommendations to any particular person. To determine which strategies and investments are right for you, please consult an appropriately qualified professional before making any decisions. Investments involve risks such as price fluctuations and loss of principal.
There is no strategy that guarantees success or prevents loss. Past performance does not guarantee future results. There is no guarantee that a diversified portfolio will increase overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Asset allocation does not guarantee a profit or protect against loss.
Guarantees are subject to the issuing company’s claims-paying ability. LPL Financial, Amwell Ridge Wealth Management, Bleakley Financial Group, and Kiplinger are not affiliated.
