The Importance of Portfolio Diversification in Retirement

Reducing risk is the primary reason to diversify your investments. Every investment comes with some risk, but by choosing the right mix of investments you should be able to achieve an acceptable balance between return and risk.

What is Portfolio Diversification

The common saying “Don’t put all your eggs in one basket” can be taken to refer to the need for diversification. Like putting your eggs in more than one basket in case one should fall and break all your eggs at once, diversification is allocating your assets to a variety of investment types.

Why Diversification is Important in Retirement

Investment returns can be high, low, or even negative depending on the economic environment, which can be very difficult, even impossible, to predict.  

While every investment involves some degree of risk, spreading your savings amongst a variety of investments can help reduce your investment risk and maintain and even grow your retirement portfolio.

Diversification is crucial to investing at any age, and it gains even greater importance in your retirement years. As you age, you have less time to make up for any investment losses. Therefore, there is a greater need to have a well-diversified portfolio that balances your risk tolerance with your investment needs.

How Can You Diversify Your Portfolio

The goal of portfolio diversification is to reduce the volatility of your portfolio by limiting your exposure to any one type of investment. By investmenting in many different types of assets, when one type is losing value, your other investments more than make up for those losses. Key to this is identifying investments or market segments that may perform differently under different market conditions.

Diversification is most often achieved by way of asset allocation between the three most common asset classes: stocks, bonds, and cash, and, increasingly, real estate via REITs (Real Estate Investment Trusts).  

Portfolios can be further diversified by making a conscious effort to invest in different economic sectors and industries, and geographically by holding publicly traded equities from foreign countries. You can even diversify by investment management style where you use multiple managers that have different styles such as growth versus value.

Perhaps more beneficial for retirement investments is the use of a dividend-paying equity strategy where you may benefit from the best of all styles. All equities in the portfolio will pay you dividends, thereby providing you with retirement income from the monthly or quarterly dividend payments while also being composed of a mix of growth and value-classified stocks.  

Rebalance and Revisit Diversification

To maintain your level of portfolio risk and potential returns it is important to reset (rebalance) your investment allocation when market performance has caused specific investments to go beyond the allocation boundaries you have set.

You should also revisit your diversification strategy regularly as you age or if your financial circumstances change. Through your retirement years, your risk tolerance and desire for investment growth, income, and/or stability may change, and your portfolio diversification should be adjusted accordingly.

Get The Diversification Expertise You Need

Ready to take charge of your future using a diversified investment portfolio  with the aim of boosting your retirement earnings? With Bloom Investment Counsel you can do just that and rest easy knowing that your portfolio is tailored to your individual risk preferences and financial goals. Let us help you create a sound and sustainable investment strategy that works best for you. Contact us today by calling at +1-416-861-9941 or emailing us at info@bloominvestmentcounsel.com


This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.

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