How to Diversify During Retirement

Blue chip stocks will provide growth with only moderate risk.

By properly diversifying your portfolio during retirement, you can reduce your total investment risk and make sure you have adequate income to last your entire life. The total riskiness of your investments should be lower during retirement than it was while you were working, as you have less earning potential to replace losses. Your investments should be a combination of safe, large-cap stocks, investment-grade corporate bonds and government securities. Diversifying your portfolio across these three areas will provide you with a safe income stream while generating growth for your investments.

Instructions

1. Review your portfolio's current asset allocation. Calculate the percentage of your portfolio invested in stocks, bonds and government securities.

2. Determine your ideal combination of these assets. There is no right answer for this calculation and depends on your risk tolerance and asset preference. One rule of thumb is to subtract your age from 100. The difference should be the percentage of your portfolio in stocks, while your age should be the percentage invested in bonds and government securities.

3. Redistribute your current portfolio until it represents your ideal asset allocation. For example, if you're holding too high a percentage of stocks, sell stocks and buy bonds and treasuries until your portfolio is properly balanced.

4. Consider investing a portion of your assets in a guaranteed life annuity, especially if you don't have a pension. This annuity will make annual payments over your entire life regardless of the performance of the stock market. This can represent a portion of your safe assets.

5. Redistribute your assets each year so they match your desired asset allocation. For example, if your stocks have risen in value and are overrepresented in your portfolio, sell stocks and invest the earnings in bonds and money markets until your portfolio is re-balanced.

Tips & Warnings

• Consider working with a financial planner to determine the correct asset allocation for your portfolio, especially when you reach retirement.

• Beware of emotional investing. You may be tempted to over-purchase assets that are doing well and sell off badly performing assets. This will unbalance your portfolio and increase your losses when the market corrects.

References

• “Fundamentals of Investments for Financial Planning”; Walt J. Woerheide; 2008
• The Motley Fool: Investing Your Nest Egg Foolishly
• U.S. Securities and Exchange Commission: Beginners' Guide to Asset Allocation, Diversification, and Rebalancing