Planning for retirement is an essential thing that everyone should do. Furthermore, with an average retirement age of 62 years and with life expectancy at 82, you will likely need a lot of financial resources. In this report, we will look at what a diversified retirement portfolio is and how to create one.
What is a diversified portfolio?
As you plan for your retirement, you can decide to take two paths. You can put your funds in a single stock like Apple or in a single asset class such as stocks. Alternatively, you can allocate your funds across several financial assets such as commodities, stocks, bonds, ETFs, mutual funds, and cryptocurrencies, among others. If you opt for the latter option, you will have a diversified portfolio.
Having a diversified portfolio tends to be a better option than having all your “eggs in one basket.” This is because such a portfolio will help protect your income when one group suffers. For example, during the financial crisis of 2008/9 when stocks plummeted, bonds rose as more people rushed to their safety.
Types of assets in a diversified portfolio
There are several assets you should have in your portfolio. These are:
- Stocks – These are shares of publicly-traded companies like Apple, Microsoft, and Facebook. Ideally, you want to have a portfolio made up of companies of different sizes, in different sectors, and in different geographical locations.
- Exchange-traded funds (ETF) – An ETF is a financial asset made of a collection of different securities that track a certain index. For example, the popular Invesco QQQ ETF tracks the Nasdaq 100 index.
- Commodities – Having some commodities in your portfolio can help to diversify your portfolio. Among the most popular commodities are gold, silver, and crude oil.
- Digital currencies – Cryptocurrencies have become an essential part for most portfolios. Among the most popular digital assets you can invest in are Bitcoin, Ethereum, and Ripple.
Types of retirement diversified portfolios
There are four main types of retirement portfolios:
Conservative portfolio
As the name suggests, the goal of this portfolio is to conserve cash by concentrating on some of the safest assets in the world. In this case, you can decide to have about 50% of your cash in government bonds from leading countries like the United States and Germany. You can also allocate these funds to quality investment-grade bonds of companies like Microsoft and Johnson & Johnson.
You can also allocate about 30% of your funds to stocks of high-quality companies like Apple, Microsoft, and Procter & Gamble (P&G). Ideally, you want to invest in companies that have a high credit rating, strong cash flows, low debt, and predictable dividends. The rest of the funds should go towards cash, ETFs, and short-term investments like T-bills and short-term government bonds.
Balanced portfolio
A balanced portfolio is one that equally balances bonds and equities. The goal is to generate significant returns from the equities section while at the same time mitigating risks by having high quality bonds. The logic of this portfolio is that equities will do well in a bull market while the bonds will protect them in a bear market. It can have 40% in bonds, 40% in stocks, and the rest in cash and short-term investments.
Growth portfolio
A growth retirement portfolio is one that aims at achieving strong returns while mitigating risks at the same time. Ideally, the portfolio should have at least 49% of its holdings in fast-growing stocks like Square, Tesla, and Snowflake. It can also have other fast-growing foreign stocks. The rest of the funds should go towards high-yield corporate bonds, digital currencies, and other risky assets.
Aggressive portfolio
An aggressive portfolio is one that allocates most of its funds in high-growth stocks, high-yield corporate debts, and other relatively risky assets like digital currencies and short-term corporate debt. The goal is to achieve higher returns while having limited downside exposure. This portfolio tends to be relatively volatile.
Building the perfect retirement portfolio
Let me be clear. There is no portfolio that is 100% perfect. Indeed, in some extreme situations, most portfolios tend to return negative growth at times. Still, it is possible to create a good portfolio that is able to withstand any events in the long term. So, here is a good example of such portfolio.
Invest in quality technology companies (65% of your portfolio)
Ideally, you want to have a forward-looking portfolio. This simply means that you should create one that you believe will perform well into the future. Today, we have a solid idea about how the future will look like. For example, in future, companies will have most of their workloads in the cloud. This means that big players in cloud computing like Amazon, Microsoft, and Google will continue to thrive.
Therefore, you should consider investing in these companies, directly or through an ETF. Some of the most popular cloud computing ETFs are First Trust Cloud Computing ETF and Global X Cloud Computing ETF.
Similarly, we understand that the future of transactions is digital. Therefore, investing in companies that offer digital payments like PayPal and Square will help you take advantage of the future of payments.
Other important assets you should think investing in are digital assets like Bitcoin and Ethereum. Indeed, as shown below, in the longer-term Bitcoin has outperformed stocks and other assets. Still, since these assets tend to be high-risk, they should only represent a small percentage of your portfolio.
Bitcoin vs S&P 500
Invest in dividend companies (20% of portfolio)
Meanwhile, investing in quality technology companies and cryptocurrencies should be complemented by having quality dividend-earning companies. This should include companies that have a long track-record of increasing their dividends over time. You should also consider companies that have an excellent credit rating. While you can invest in these companies individually, you can also invest in them using ETFs. Some of the best ETFs to consider are iShares International Select Dividend ETF and Invesco S&P Ultra Dividend Revenue ETF.
Finally, you should have the rest of the funds in high quality assets like gold and bonds.
Final thoughts
Having a quality diversified portfolio is an excellent way to ensure a good retirement. We recommend that you invest most of your funds in quality stocks, because of their long track record of performance. You should also diversify with quality dividend-earning companies and Real Estate Investment Trusts. Most importantly, you should add some risky assets like Bitcoin and Ethereum in the portfolio.
