Mar 15, 2012

How Diversified Investments Are Beneficial in Retirement

What many people don't understand is the importance of saving for retirement earlier on in their lives. The sooner you start with a retirement plan, the bigger your retirement investment will be. However, a lot of retirement plans only stick to investing in certain market segments.

At times the market segments that you are investing your savings in do not grow due to any number of reasons. That is why it is important that your financial advisor hedges your retirement investments against the volatility in the market and diversifies your investment.

Diversification is very important in investment and that is why financial experts deem it the most beneficial way to invest your money, especially if it is a retirement investment fund. The benefits of diversifying your retirement investments are many.

What level of risk are you comfortable with?

If you have a long time to go till your retirement then you can safely assume more risk in your retirement funds portfolio. Higher risk always translates into higher returns. On the other hand, if you have less time to your retirement then it would be better to take a more risk averse to investment and invest in places like the shares of blue chip companies, real estate, etc. Risk averse may not translate into very high returns, but the diversification will result in decent, long-term and steady returns.

Allocation of investment in stocks and bonds

Stocks are more volatile than bonds, but also have higher returns over the long run. Bonds on the other hand are not as volatile and will hedge your investment against the volatility of stocks. A combination of investment in stocks and bonds results in much higher returns that simply putting your money in the bank's saving account or buying term deposits. The percentage return on bank products is always less.

Investing in foreign stocks

Adding foreign stocks to the portfolio is a great move. But make sure that you have studied the market and companies that you are investing in. Every country's stock market moves in a different direction. Foreign stocks yield higher returns if invested correctly.

Investing in large and small companies

Many investments are diversified by a mix of stocks and dividends of large and small companies. This is done to make the investment safer. Some small companies have good potential returns in the future.

Financial experts will tell you that diversification is very important for any investment fund. The reason behind it is that diversification offers security against market volatility and makes sure that your investment earns something in the long run. Putting all investments in one place could result in a big loss if the market falls. That is why it is said Don’t put all your eggs in one basket.

Author: Allan has been writing about personal finance and retirement planning for the last 3 years. He specialises in smsf and retirement strategies.

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