Diversifying your retirement portfolio is an important step before your “New Beginning,” and sectors play a major part in that diversification. It is also a wise idea to look at what may happen should you diversify too much.
Take a look at how diversification and the power of sectors can impact your retirement.
Diversifying Your Retirement Portfolio
Even if you know very little about investing, it is likely you have heard that keeping your stocks diversified is a good idea. Theoretically, you cannot really argue against the benefits of a diverse portfolio. However, it is possible to sacrifice returns through too much diversification. This can express itself in a few ways, but something we work to avoid is blindly diversifying.
The theoretical advantages of diversifying are no excuse for closing your eyes to the information that is out there. If you do your research, have your finger to the pulse of the give-and-take of the markets, you are going to be making informed choices. We do not want to be acting on hunches or emotion, but rather, grounding our decision in methods, data, and history.
Here at Miramontes Capital, we had a client who thought (after meeting with a different financial professional) that the standard portfolio allocation of 60% stocks and 40% bonds was providing him with adequate diversification and income. After we met with him and reviewed his portfolio, we realized together that his specific income need required a higher dividend payout than he was receiving from his current investments. We began looking at different sectors to branch out into, and were able to arrive at a sector diversified portfolio that would provide him with the income he needed without requiring him to sell off shares every month to cover his expenses. A broader range of eight different sectors gave his portfolio a level of diversification that matched his needs.
This brings us to the power of diversifying your retirement portfolio through sectors. Investors think of sectors in a few different ways. You can decide to invest in industrial sectors, meaning you would choose from utilities, pharmaceuticals, real estate, aerospace, energy, software, and others. This is a common and helpful way of thinking about the market, because it allows you to isolate potential risk when you are structuring and restructuring your portfolio. If technology is plateauing just when you get a bonus at work that you would like to put into stocks, you may diversify differently that month by choosing real estate. Other sectors can be geographically organized. Investors may try to find emerging markets in other countries to design funds around.
Are we trying to predict the markets, which so many professionals backed by studies and statistical data say will never work? Not at all. We just want to avoid throwing our money into sectors that have a high likelihood of taking a downward turn. This is not encouraging risk—rather, it is quite the opposite: We are advising you to keep an eye out for it and diversify away from it. We should all try to make our investments count by buying them at the right time.
By looking at sectors, we can see what has been happening over time in an industry and make informed decisions about the future. Choose a sector you would be interested to invest in and use Morningstar or Bloomberg to see what that sector has been up to in the past 36 months. Does this help you infer anything about the potential for gain or loss in the future?
For more help regarding diversifying your retirement portfolio, contact Miramontes Capital.
Schedule an in office or over the phone consultation to discuss how Miramontes Capital can help you with your new beginning through retirement planning.
Miramontes Capital is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Miramontes Capital and its representatives are properly licensed or exempt from licensure. This video is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Miramontes Capital unless a client service agreement is in place. Miramontes Capital is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Miramontes Capital and its representatives are properly licensed or exempt from licensure. This video is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Miramontes Capital unless a client service agreement is in place.