How to Diversify Retirement Savings

The sooner you start saving for retirement, the larger your nest egg will grow. When you start to tap into your retirement savings, though, segments of the market may not be growing at the rate that you would like, or may even be experiencing a loss. To hedge your bets and reduce the volatility in your retirement savings, you should diversify the components in your retirement savings.

Difficulty: Moderate

Instructions

Things You'll Need:

• Funds to invest in your retirement savings
• Account with a brokerage house

1. Calculate how many years it will be before you need to withdraw from your retirement savings. If you are several decades from retirement, you can assume more risk in your retirement portfolio in the hopes of a higher return, despite short-term losses. If you are nearing retirement, you should diversify your retirement portfolio with more conservative choices.

2. Decide what level of risk is comfortable for you. The more risk you are willing to take on, the greater the return (or loss) possible. Your tolerance for risk should usually change as you approach retirement, at which time you may opt for slightly lower returns on your savings but less volatility.

3. Allocate your retirement savings between stocks and bonds. Though stocks average a higher return in the long run, they fluctuate more than bonds. Both stocks and bonds have historically performed better than cash accounts, such as savings accounts and CDs.

4. Invest in foreign stocks. The return on foreign investments does not necessarily move in the same direction as American stocks, so be sure to invest only in companies and countries that you have thoroughly researched.

5. Invest in stocks of small and large companies. Stocks of small companies are riskier, while stocks of large companies provide stability in your retirement savings portfolio.

6. Reevaluate your retirement savings portfolio on a regular basis. Though it is important to keep a diverse retirement portfolio, the mix of stocks and bonds that you choose may change with your investment goals and as you near retirement.

Tips & Warnings

• In addition to individual stocks, you can also allocate your savings to managed funds. You can find funds that invest in companies of a particular size, specific business sectors and companies abroad, letting you diversify your retirement savings in multiple ways.
• Many financial companies offer life-cycle funds, which provide an appropriately diverse portfolio based on the number of years you have left until retirement.