An Overview of Steps You Should Take for Proper Diversification of Investment Portfolio
How to invest judiciously? What are the options available for diversification of portfolio? If these are the questions you are trying to find an answer for then you are at the right place since this is the topic we will be exploring in the following sections so that it becomes easier for you to manage your portfolio in right manner.
How to achieve proper diversification of portfolio
Most people have the primary aim of achieving lifetime income as well as long-term growth of their portfolio.
It is most likely that your certified financial planner will suggest diversification of portfolio so that a specific percentage is invested in immediate annuities (this way you are assured of an income source that cannot be outlived) and the balance should be used for creating a diversified portfolio consisting of bonds and stocks while a certain portion should also be kept aside as cash reserve.
What is the benefit of such investment strategy?
By creating this type of portfolio (with the help of your certified financial planner) you will be able to ensure lifetime payments through annuities and at the same time achieve capital growth (long-term) by using bonds and stocks. Moreover, there will be a cash reserve which you will be able to use in case of emergencies. Let us look at few of the other benefits of such investment strategy.
Benefit #1: Act Like Feeder Fund
Investment in bonds and stocks would work like feeder fund for cash reserves you have. It is likely that your cash reserves would fall when you utilize it for paying your current expenditures and this is where your investment in bonds and stocks will become useful since you will be able to periodically withdraw funds out of portfolio (consisting of capital gains, dividends, etc.) to replenish your cash reserve.
Benefit #2: Provide Long Term Capital Growth
The other benefit of selecting this type of structure for your portfolio is that it will facilitate long-term capital growth. A mix of bonds and stocks in your portfolio will be able to easily outpace inflation in the long term. This way you will be able to offset the effect of rising cost of annuity payments.
Benefit #3: Financial Flexibility
Another advantage of creating this type of portfolio is that it gives you greater financial flexibility all throughout your retirement. Since you have made an investment in immediate annuities, those funds will not be available and help in securing lifetime payments for you. What if any unexpected large expense comes up (like a medical expenditure) or if living expenditure goes higher than what you had anticipated? Well, for these situations you will have your bonds and stocks to tap into.
The Bottom Line
To conclude we will say that creating a portfolio consisting of a judicious mix of immediate annuities, bonds, stocks and cash reserve can certainly be quite useful. However, you will have to consult a certified financial planner to know more about the percentage each one should have depending on your investment profile.