I’m Retired and Regret Not Diversifying My Investments — Here’s Why
Written by
Sean Bryant
Edited by
Molly Sullivan
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When saving for retirement, diversification can be low on the priority scale for some people. Instead, they’re worried about hitting a magic number and finally throwing in the towel. Looking back, there can be regret since a failure to diversify over decades can have many consequences.
Are you in a similar situation? It’s exactly where Frank H. has found himself now that he’s several years into retirement. While he had dreamed about enjoying his retirement without worrying about money, he’s now looking back, knowing there was more he could have done to increase his nest egg.
Whether retirement is knocking on your door or you are years away from clocking out for the last time, diversification is crucial to building and maintaining a successful retirement portfolio. In this article, we’ll explore why Frank regrets not diversifying his investments, helping you avoid the same mistakes he made.
Constant Worry About Market Fluctuations
Market volatility is normal. One day the market could be up 5%, and the next, it could be down 3%. Within these blanket movements, certain industries have wider swings. For example, the technology sector could drop 20% due to a bad earnings call from Apple. At the same time, the consumer staples sector might only drop 3%.
“Since my portfolio lacks diversification, I am heavily invested in certain segments of the market, which means I both win and lose big,” Frank said. “With an undiversified portfolio, I find myself constantly tracking sector movements instead of enjoying some of the best years of my life. To solve this problem, I plan on spreading out my investments equally across numerous sectors or purchasing total market index funds, mutual funds, or ETFs.”
Lost Growth
The market as a whole returns an average of 10% per year, but this doesn’t mean that each sector or industry yields the same results. In fact, over the past few years, the technology sector has run wild while the real estate sector has remained flat. A portfolio without proper diversification opens the door to big gains if you are invested in the right places or stagnant growth if you don’t play your cards right.
“By diversifying my retirement funds, I am more likely to reach that average return of 10% per year instead of having volatility based on how each company or sector performs,” Frank added. “Additionally, with diversification, I am reducing the risk of portfolio drawdowns and maximizing the power of compound interest.”
Inconsistent Returns
By now, you should understand that the market has a mind of its own. Although many well-known investors, like Charlie Munger, have a stellar history of market returns, no one can truly predict what will happen. During times when the market was down, such as in 2008 and 2022, retirees had no choice but to take distributions when their investments were at low points.
“Instead of holding funds in other avenues, such as cash, bonds and real estate, I was too heavily invested in the stock market,” Frank said. “This created a lasting impact on my portfolio. I had to sell more assets than normal at low points to sustain my lifestyle. When the market did rebound, my asset base was less because of the additional funds I took out. Inconsistent returns and volatility in distributions can lead to running out of retirement funds.”
Diversification Seems Complex
“Now that I’m retired, diversifying my portfolio seems complex and does come with unfavorable tax implications,” Frank said. “For example, I have a chunk of my retirement in a taxable brokerage account. The second I sell an investment, I have to report the gain or loss on my individual income tax return and pay any corresponding taxes.”
Adding to the complexity, reporting a high amount of capital gains could push someone into a higher tax bracket, increasing their marginal rate and their Social Security income taxability. Although they can rework some of the funds in their tax-advantaged accounts, like their 401(k) or IRA, they’re limited in options when it comes to their brokerage account.
The Bottom Line
Is your portfolio diversified? There’s no set-in-stone way to diversify a portfolio; however, there are some tips and tricks to keep in mind. First, you want to have your funds across different investment types. This could be stocks, bonds, real estate, cash, annuities, or life insurance.
Next, within the stock sector, you want to have different types of investments, such as U.S. stock and foreign stock. Holding a stock that tracks the entire market unlocks ultimate diversification, but if you want to take a more hands-on approach, choose investments in different sectors and industries.
If you’re still confused about how to get started with portfolio diversification, reach out to a financial planner.
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