World Musings

Eventually one day we all want to retire and not have to work at all. Instead of working for money, we will be wanting our money to work for us. Hopefully you are one of the many people out there that is putting away into an IRA or 401K in preparation for retirement, assuming we still have an economy in the future similar to what it is today.

When you hear the experts talk about diversifying, of course we all know they are talking about not putting your eggs all in one basket. But in my opinion, the misconception is that diversifying is something you should do long before you retire. My own mindset has changed when it comes to which funds to invest in within my portfolio. I think it’s ok to only have 2 or 3 long term funds. Especially when you are young, you probably don’t have very much money in a retirement account anyhow, so spreading yourself thin isn’t always the best thing to do. The market will have its cycles, so you’ll watch your investments go up and down at certain times. But over time, the trend is always upwards usually. My opinion, while someone is still young, is to not diversify as much and go long term aggressive. Maybe split your portfolio between long term domestic and international funds. Your goal should be to make as much cash as possible. Short term funds might be safer, but the returns alone aren’t going to set you up for retirement either.

Now, this is where diversifying really is a good idea. When you are near retirement age, or are retired, you want to create a situation where you make money no matter what. You want to be able to collect interest every year from your funds so you can have a paycheck given to you each month out of your portfolio. So no matter what the economy does, you need to be able to still generate an income by having your money work for you. Hopefully at this point you might have $2-3 million dollars. If you think this is a lot, this will probably be a minimum amount that a lot of us will need when we retire. That $2-3 million can be spread across maybe 4 or 5 funds. One of the funds can be an aggressive fund that might do very well one year and give an excellent return. Another fund might be a short term fund that will always return 2% - 8% no matter what. Another fund could be in precious metals that will give a return if we are in a serious recession or the currency is devalued further versus other currencies. And the rest of what you have could be put into a no-load index fund that will ride flat during times of recession, but give a fairly decent return when the economy is doing ok.  And once again, this is just my opinion.

So during retirement, if you have a large sum of money, and it is diversified amongst funds that all have completely different strategies, then you can pretty much guarantee yourself a return on something every year. One year, one fund will be up, while another will be down and vice versa. So near retirement, or retirement age, is definitely the time to diversify. While you are young, going long term will probably give you the best chance at accumulating as much as possible for retirement. Don’t mis-understand the experts and spread yourself too thin while you are young.