The Importance of Cultivating a Diverse Investment Portfolio for Your Retirement Plan
In order to create a viable and robust retirement plan, it’s important that you consider investment opportunities in addition to more traditional retirement planning methods like an IRA or 401(k). Investing wisely can be an excellent way to bolster and grow your retirement funds (the key word here being wisely).
In terms of conventional investment wisdom, developing a diverse portfolio is a foundational principle for successful investing. In theory, diversifying your portfolio will help you minimize risk, and, therefore, maximize your returns.
To illustrate, consider this scenario: John heard from a friend that now is the time to invest in real estate. Low costs. Big returns. So John decides to pour all of his available investment capital into the local real estate market with the notion that his profits will set him up for retirement. For sometime his scheme goes well, but some months into the endeavor, the market goes south, and quickly. John can’t sell his property because no one’s buying. He’s left with devalued properties, and not liquid investment assets, and bleak prospects for his retirement fund.
Now, John was right to think that real estate was a good investment; it often is. Where John went wrong was putting all his available investment capital in his local real estate market. If john had diversified his investment portfolio, say, into thirds, then he could have minimized the fallout from the real estate crisis and managed his losses more deftly. Ideally, John would have allotted some of his capital into real estate and invested the other portion into stocks. Or he could have bought gold. Or joined a mutual fund. Diversifying his portfolio would have prevented him from sustaining devastating losses because the other portions of his investment capital would have been secured in other investment markets.
Think of it this way: don’t put all your eggs in one basket. If you do, you might lose the eggs and the basket.