Portfolio diversification is a popular topic that has different meanings to different people. What most people can agree on, though, is that the aim of a diversified portfolio is to maintain overall positive growth through market fluctuation.
So now you may be wondering how to diversify your retirement portfolio. Typically, one could start with an S&P 500 index fund that provides exposure to 500 stocks because that number may feel like diversification. The catch is that S&P 500 holdings are weighted. The largest index weighting is information technology, making up 28.7%—meaning that almost 30% of your portfolio would be invested in tech.
These “weighty problems” may be avoided by thinking beyond the Index. Consider these five tips that will help you manage your own diversified retirement portfolio.
1. Think beyond stocks and bonds
The traditional diversification mantra postulates the best investing formula as a 60/40 split between stocks and bonds. But there are many other ways to spread and grow one’s wealth. For example, in the realm of non-tangible assets, one may look to invest in money markets, REITs, convertible notes, crowd investing, cryptocurrencies, non-fungible tokens, peer-to-peer loans, and much more.
Some investors like to invest chunks of their portfolios in tangible items, like real estate, precious metals, and more. The point of thinking beyond stocks and bonds is that it moves parts of a portfolio outside of one specific financial class. By diversifying asset classes, investors can try to avoid the impact of negative swings that can happen within the market.
2. Consider correlations
Assets with prices that move similarly are considered highly correlated. If every asset inside a retirement portfolio is moving up, that’s great, but realize that they could potentially all move down together as well because of their correlation.
When seeking diverse investments, you may want to look for assets that do not move in conjunction with one another. You can start by researching various assets to get a better understanding of intermarket relationships. Then, you could look intoto investment products that do not trend in tandem.
3. Don’t get too personal
Believe it or not, one’s employment and location can affect his/her portfolio diversity. Let’s say your company offers and matches your contribution for stock options. You may want to consider your sector when you start your research for diversification. For instance, if you work for Amazon, your portfolio is already heavily exposed to tech, so you may want to evaluate other asset classes or alternative investments.
Other factors you may want to consider are possible events that could have either a positive or negative portfolio effect in the geographical locations of your investments. For example, the number of companies on the S&P 500 that tagged “wildfire” as a risk factor has jumped in the last decade due to the increased frequency of fires in California.
4. Expand your horizons
The U.S. is a great place to invest, but it’s a big world out there. You can consider investing in some global or regional index funds. Countries grow at different rates. Thus, you may want to consider taking advantage of high growth periods in other countries, while also diversifying the risk of any negative impact events occurring in the U.S.
5. Stay dynamic
Keep in mind that markets and assets are constantly evolving and that they very rarely travel in a straight line. Planning and reallocating money is critical to making the most of a retirement portfolio. Rebalancing can be especially important after significant growth in one portion of a retirement portfolio.
For example, investors could consider which sectors will provide the next round of big growth after a stock boom. And you may want to weigh in on how you’d like the money made from the boom to be reallocated to new locations to take advantage of new growth in other areas.
How to diversify your retirement portfolio
There are many ways to diversify your retirement portfolio. One option may be to start by telescoping out and thinking about your actual risk exposure. From there, you may be able to formulate a plan to achieve better diversification and seek out platforms and services that fill those needs. Digital Trust allows retirement portfolio investors one easy place to hold, track, and trade alternative assets within a self-directed IRA.
Open up a retirement account with Digital Trust* and start diversifying your portfolio today.
* Digital Trust, LLC is a custodian of self-directed accounts whose role is nondiscretionary and administrative only. The accountholder must direct all investment transactions and choose the investments for the account. Digital Trust has no responsibility or involvement in selecting any investment. This letter shall not be construed as investment, legal, tax, or financial advice. Please consult with your competent tax advisor and/or legal counsel.