Retirement Myth – Diversification Pixie Dust

Retirement Myth – Diversification Pixie Dust

Diversification means I have low risk, right?

Diversification has become like pixie dust in the financial world. People hear that word and think everything is good because they are diversified, but that is not always the case.

The thought is if you diversify then you will have a lower risk because you are not putting all your eggs in one basket as the saying goes, however, while diversification and asset allocation are important it does not guarantee lower risk.

Retirement Myth – Diversification Pixie Dust: Sometimes you can have a highly diversified portfolio among different stocks or funds, but they are all highly correlated meaning they go up and down about the same. It would be like putting all your eggs in different baskets but then putting all the baskets in the back of the same pick-up truck. When that truck hits a bump, all the baskets fly, and all the eggs break.

You simply take your age and subtract it from 100; the answer is the most you should have at risk (for example 100 – 60 = 40% of at-risk investments). Now, remember that is a guideline, some will have a little more at risk and be a little more aggressive, and some will have less at risk and invest everything more conservatively.

The average 60/40 portfolio, when stress-tested has an average drawdown or loss potential of 30% or more. Is that lower risk?

So, while diversification is good, in and of itself does not mean you are low risk. 

If you want to know what your risk is, have a risk assessment done on your portfolio.  This report is more than a snapshot of your portfolio, it analysis the funds in your portfolio and can give you a probability of upside and downside return potential. Everyone, especially those in or nearing retirement should have an updated risk assessment done on a regular basis.

Michelle Bertram and Beverly Bertram are financial advisors living in Mineral Point WI and serving the surrounding communities. Michelle Bertram does financial planning for retirees along with business consulting. Beverly Bertram specializes in retirement planning and income planning for her clients. Michelle Bertram and Beverly Bertram are authors of the book, Creating You DREAM Retirement and creators of the DREAM Retirement Process. Serving Madison WI, Verona WI, Mount Horeb WI, Barneveld WI, Dodgeville WI, Dubuque IA, Platteville WI, Lancaster WI, Cuba City WI, Fennimore WI, Darlington WI, Monroe WI, Spring Green WI, Black Earth WI and beyond