Investors planning for retirement (and it’s never too early to start) certainly have plenty of financial headwinds to consider when it comes to executing a tailored strategy to their own unique situations. From rising costs of living to volatile markets and economic uncertainty (I wish I had a crystal ball), investing involves plenty of forms of risk.
Quick Read
- Investing for retirement is great, but how one chooses to put capital to work right now matters a great deal.
- For those looking for ways to maximize their retirement planning journey, here are three tips most financial experts will pound the table on as ways to think about constructing one’s portfolio.
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That said, as most investors are well aware, failing to invest and watching one’s dollars lose purchasing power sitting on the sidelines can be an even more painful reality. Thus, most financial experts will tell those looking to retire at any point in the future to consider putting at least a significant chunk of one’s savings into assets that can appreciate over time.
Expectations are that the median American household will need around $1.5 million to retire comfortably – a figure that varies greatly with one’s locale. Indeed, at a 4% “safe” withdrawal rate, that $1.5 million will only go so far, providing investors with around $60,000 of income to be supplemented by other forms of income (social security, pension, rental, other income) over time. I’m still on the younger end, and given where inflation has been of late, I think that number is going to get a lot larger over time.
So, for those looking to grow their portfolio into a seven figure (or higher) passive income stream in retirement, here are three strategies I’ve found most helpful to me in how I think about setting my own portfolio up for success.
Diversification Matters
Portfolio diversification visual on a tablet.
Portfolio diversification are two words that can bring about a blank stare from some investors. Many may think – I put everything into a market index ETF – that’s diversified, right?
Well, maybe for a portion of one’s equity portfolio. However, I know there are many financial experts out there who would pour at least some cold water on that idea. Indeed, given the fact that Nvidia (NASDAQ:NVDA) recently jumped to account for roughly 8% of the entire S&P 500. That means that the other 499 companies accounted for the other 92%. When you add in Microsoft into that calculation, that number is closer to 15%.
Two stocks being that big of a weighting in any portfolio would certainly push the boundaries of what most investors would deem “well-diversified.” And while Nvidia and Microsoft are world-class companies in their own right, it provides food for thought for those thinking about equal weighted funds versus market capitalization weighted options.
But the bigger diversification issue I think most investors can come across is not diversifying enough into other asset classes. I’d argue most investors should have exposure to fixed income (bonds), real estate, gold, and other assets (crypto if you like). And depending on one’s age and risk preferences, their weightings in these other asset classes should probably vary significantly.
Given where valuations are today, I’m probably much heavier on the bonds and real estate side of my portfolio than many out there, but that’s just me. Others who have taken far more risk in other assets such as crypto in recent years have outperformed me, but I’m okay with that based on my risk profile.
Asset Allocation
The letters “AUM” on wooden blocks signifying assets under management.
Once investors have determined which buckets they want to put capital into, assessing what percentage of one’s holdings should go into each respective category is a whole other game.
I started on that topic in the last bit, but weighting one’s portfolio matters a great deal. For an investor with exposure to stocks, bonds, real estate, gold, and crypto (let’s say), the question is: what should the weighting be for each asset category?
An investor who is almost entirely invested in crypto and speculative assets, with a tiny slice invested in bonds, real estate and gold, may be hurt pretty badly during a severe downturn. Well, in a severe downturn, I’d argue everyone’s getting hurt. But it’s the degree of pain one is willing to endure that should drive at least some of the portfolio allocation discussion among investors, particularly at this juncture of the market.
That’s not to say those asset classes can’t and won’t make new all-time highs that are a lot higher than where they trade today. They almost certainly will. It just depends on one’s time horizon and how much one can confidently afford to lose. For those nearing retirement, considering bonds, annuities and other lower-risk assets can provide very valuable peace of mind that can outweigh the FOMO in the near-term as one watches their neighbors get richer.
Pay Oneself First
Income growth visual
But perhaps the golden rule I’ve seen espoused again and again from almost every personal finance guru out there is to pay oneself first. It’s impossible to have a portfolio to allocate assets to and diversify if there’s no extra income to throw into that pot to begin with.
Paying oneself first is the idea that the bills will always be there – putting one’s retirement savings at the top of the list in terms of “creditors” one must pay each and every month can force and individual or household to spend within their means and prioritize.
At the end of the day, if we’re trying to build a big and bright tomorrow, that kind of needs to be the thought process behind saving and investing. It’s not a one-time thing: money ought to continue to flow in, to allow for the kind of dry powder that can be allocated when times get tough (and future return potential improves).
The good news is that most Americans have a range of retirement savings vehicles to rely on to build such pots of money up to invest. I’ll dedicate a whole series of articles to that discussion. But having something to work with is step one, meaning budgeting and prioritizing investing (the boring stuff) needs to happen before the fun stuff (watching one’s portfolio grow) can truly happen.
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