When it comes to your future, ensuring you have the funds to support the retirement you’ve always dreamed of is essential. Building a retirement portfolio allows you to invest now to allow for an income when you stop working during retirement.
Diversifying your retirement portfolio is essential when it comes to mitigating risks and optimising your savings for future you. Whether you’re just starting your retirement planning journey or you’ve been putting money aside and you want to know how to optimise your savings, this is everything you need to know about diversification, it’s benefits and exactly how to go about it.
What is diversification?
If you’ve been working on your retirement portfolio for a while, there’s no doubt you’ve heard the term ‘diversification’ being thrown around – but what exactly does it mean?
Essentially, diversification is all about not putting all your eggs in one basket. When it comes to investing, putting all your money into one investment or asset can go one of two ways. The first, it goes up in value, and you make a profit – a great result, by all means! The second way it could go, however, is that it goes down in value, and rather than making any money, you lose everything.
Diversification helps to reduce this risk by spreading your investments across a range of different areas. It’s a really common strategy, especially in retirement planning to ensure your level of risk is as small as possible. Diversification does two things, it helps to ensure you won’t lose everything from one investment and it helps to boost your chances of positive returns!
Why is diversification important?
When it comes to your retirement planning and your investment portfolios, diversification is crucial if you want to reduce the likelihood of large losses. When you spread your entire portfolio across a number of different assets, you’re way less likely to have all your hard work wiped out due to one unfavourable event.
Whilst of course investments are always a risk (and some of the risks you can’t avoid!), ensuring you have a diversified retirement portfolio really helps to mitigate those risks as much as possible.
How can I diversify my assets?
There are a number of different strategies you can implement when it comes to diversifying your retirement portfolio. The general gist of it is though that you should be dividing your assets across a number of spaces with little to no correlation. This is so that is one falls, the other goes up.
These are some of the most common ways you can diversify your retirement portfolio.
Utilise multiple currencies
When it comes to diversifying your assets as a UK resident, you can use what is called an Internaltional SIPP to diversify your assets across multiple currencies. This helps to lower the risks associated with fluctuating currency rates. If your plans change and you find yourself returning outside of the UK, you can easily move your assets into a SIPP from that country.
Change location
Investing in assets across different countries or regions is a great opportunity for diversification. This is because you aren’t relying solely on one country’s economy to grow your wealth. Try to stick to less volatile markets like the US or the UK rather than emerging markets like India, which can come with more risks.
Look into life insurance
Usually, life insurance is something we think about for estate planning, not retirement planning and whilst that’s also the case, some policies can help you diversify your investments!
Whilst life insurance is normally not something you ever see a return on, it’s more for financial protection for your loved ones; you may want to look into your life insurance policy and see if you can find a policy that works similarly to a mutual fund. By checking in with your life insurance company or chatting to a financial advisor, you can get more out of your life insurance policy while you’re still around to see it!
Are there drawbacks?
Like anything, there are of course risks associated with diversification. Whilst it is a strategy that helps limit your risk exposure, it doesn’t allow you to avoid risks completely.
There are two main types of risk in any investment, they are:
- Systematic risk: Inflation, rate hikes, recessions etc.
- Unsystematic risk: Specific to an industry, sector, region or type of asset.
Diversification helps you reduce unsystematic risks, but it doesn’t help you avoid systematic risks and changes.
You also don’t want to spread yourself too thin, a great diversified retirement portfolio should be balanced as well as aligned with your investment goals.
When it comes to ensuring you have the life you’ve been looking for in retirement, retirement planning is key. Diversify your assets and investments for the best results and work towards future-proofing your finances.
The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any finance decisions. Appropriate independent advice should be obtained before making any such decision. London Loves Business bears no responsibility for any gains or losses.
