Investing in your future is essential.

Building a retirement portfolio allows you to invest now to provide an income when you stop working and make the most of your retirement.

But having the right strategy is vital to give your money the best chance to flourish.

Diversifying your retirement portfolio is a method to achieve balance and limit exposure from its most formidable foe – risk.

In this guide, we look at how you can diversify your retirement portfolio and optimise your retirement savings.

Core components of a diversified portfolio

Investments typically fall into one of the following five asset classes:

Equities

These are stocks and shares you buy in a company. This is usually done by purchasing individual stocks and shares or investing in a readymade basket of equities via a fund.

The share price (value) is tied to the company’s performance. The better they perform, the more money you make.

While equity investments generally have a strong rate of return, they are also the most risky.

Characteristics:

• Higher returns than other asset classes
• Higher level of risk and exposure to market volatility

Fixed income

These are usually bonds, which are loans to governments or companies.

As the name suggests, fixed-income products pay a fixed amount to investors over a fixed period. Investors are paid in the form of interest or dividend payments.

The two most common types of bond investments are:

• Corporate bonds
• Government bonds (these are called gilts in the UK)

These fixed-income products are usually bought as individual bonds or through bond funds. Like other funds, bond funds give the investor exposure to a readymade basket of bonds and other debt instruments.

Characteristics:

• More stable returns and a steady stream of income
• Less volatile than other asset classes

Be aware that the characteristics of high-yield bonds are speculative. These bonds are rated with a low credit rating by international credit rating agents such as Moody’s rating of Ba1 or below and S&P rating of BB+ or below.

These bonds carry a relatively high coupon to reflect the higher level of risk to investors.

Cash investments

Cash investments are short-term investments that can protect your money from market risk. Your capital may also benefit from modest interest payments.

Two examples of cash investments are:

• Money market funds
• Certificates of deposit (CDs)

Cash investments may also include bank products such as savings accounts where your money can earn interest.

Characteristics:

• Relatively stable and low risk
• Lower returns and may not keep up with inflation

Ways to diversify your retirement portfolio

Proper diversification requires you to invest in assets with a low correlation, meaning they behave differently from each other. The idea is, if the value of one asset falls, the other goes up.

Below are some of the ways you can diversify your retirement portfolio.

Asset allocation

Asset allocation involves dividing your investments across the different asset classes mentioned above.

How you divide your investments will depend on several factors, such as the risk level you are comfortable with, your time horizons and your retirement goals.

For example, equities are high risk, high reward. This means a portfolio heavily weighted towards equities will carry a greater risk than one that is more balanced.

By location

Investing in assets across different countries and regions means you are not dependent on one country’s economy or its government’s policies. This can help minimise the impact of market fluctuations.

Be aware that investment risk can increase in different regions. The UK and the US are considered ‘developed markets’. As such, they are generally less volatile than countries such as Russia and India, which are emerging markets.

By sector

This involves investing in various sectors or industries, such as technology, healthcare, finance, and energy.

Ideally, you should invest in sectors or industries with a low correlation. Doing this can help reduce the impact of a downturn in any particular industry.

Make use of funds

Rather than buying individual assets, you could invest in mutual funds and ETFs. These can make the process of building a diversified investment portfolio more straightforward.

There are various different types of funds. Two of the most common are index or fixed-income funds.

With index funds, you can benefit from instant diversification. These funds allow you to invest in a readymade basket of assets for a given index, such as the S&P 500 or FTSE 100.

Those who want to add fixed-income products to their portfolio can invest in a bond-focused exchange-traded fund (ETF).

Life insurance

We usually think of life insurance as a product used for estate planning that provides financial protection for our loved ones when we are gone.

And while this is the case, some life insurance policies can also help you diversify your retirement portfolio.

Indexed universal life insurance is a type of permanent life insurance. A policy has components – a death benefit and a cash value.

The cash value portion is tied to a stock market index such as the Hang Seng or S&P 500. The insurance company that runs the policy will invest in a wide range of assets of a given index.

This means they work in a similar way to a mutual fund, providing greater exposure to help diversify your investments.

Get your retirement plans on track with Holborn Assets

Retirement planning is about preparing for the future. It is about making sure you have a nest egg big enough to support you financially when you choose to stop working.

Building a well-diversified retirement portfolio is one way to help you financially prepare.

That means picking and/or guiding you to the right mix of assets that align with the levels of risk you are comfortable with and your goals. In other words, creating the right balance of risk and reward.

There is no one-size-fits-all solution. But if you are looking for the optimal solution for you, we can help.

At Holborn Assets, we provide financial advice and wealth management solutions tailored to you. We work closely with clients, providing award-winning service and support to help them reach their financial goals.

We can’t predict the future, but we can prepare for it. Make sure you are prepared with Holborn Assets. Book a free, no-obligation meeting today and learn how we can help you.