2 Things You Have To Do With Your Retirement Investments

It's not enough to invest in good companies and leave your portfolio alone. Here are two things you'll need to keep an eye on as time goes on.

Aug 16, 2014 at 9:31AM

Flickr / archeon.

There are plenty of things you have to do in order to save and invest effectively for retirement, from reinvesting your dividends to using your tax advantages. However, one of the simplest concepts is critically important to protecting yourself from declines while making your returns more consistent.

One of the most important adjustments you can make to your retirement strategy is to learn how to think defensively, and the best way to do this is not by investing in less risky assets like bonds, but to properly diversify and rebalance your portfolio.

A diversified portfolio means more than simply spreading your money out among a basket of stocks. You need to make sure the companies you invest in are different enough from one another to protect you from any sector weakness.

For a basic example, investing in Citigroup, Bank of America, and JPMorgan Chase does not make you diversified. Sure, you're somewhat protected if any one of these companies starts to do poorly, but what if the entire sector crashes like it did a few years ago.

And even though it may not be as obvious, watch out for companies that are linked together. For example, consider Best Buy and Intel. If computer sales began to struggle, both of these companies could suffer tremendously. It's impossible to invest in companies that are completely independent, but be aware of how your stocks are similar to one another and adjust accordingly.

Your allocations don't need to be perfectly even, but you don't want too much of your portfolio tied to any one industry.

Rebalancing: why it matters so much
It's not enough to simply diversify your portfolio, then forget about it for a while. Over time, different stocks will perform differently, and this can take your portfolio from diversified to not-so-diversified.

As an example, let's say you made five $10,000 investments a decade ago, in Apple, Pfizer, ExxonMobil, Caterpillar, and Wal-Mart. So, each made up 20% of your portfolio and you were well-diversified when you started.

Fast-forward ten years, and some of these companies have performed well and one (Apple) has been an absolute home run. As you can see from the chart below, your portfolio would have performed really well if you simply had left it alone.

The problem with this is now your portfolio is way too dependent on Apple, which would now make up more than 80% of your holdings. If Apple stock were to lose 50% of its value (hey, it's happened before), your portfolio's value would drop by more than 40%. Are you willing to risk a hit like that to your portfolio from a single stock? You shouldn't be.

Also, if the other stocks in the portfolio started to perform well, you would barely feel the effects. In our example above, even though Pfizer returned more than 40% over the past decade, it would now make up less than 3% of the portfolio, so any future gains would have a very minimal effect on your overall portfolio.

The action plan
Take a look at your own portfolio and ask yourself if your investments themselves are diverse enough. Once that's established, check if your exposure to any particular sector is too high. Especially check your best performing investments to see if they now account for a disproportionally high percentage of your portfolio. If it is, you may want to sell some shares of one investment and buy more of another in order to balance things out.

Remember, the goal of investing for retirement is to make consistent, stable returns, not to hit home runs and take risks. If one of your retirement stocks shoots through the roof, that's great, but there is nothing wrong with taking some of your gains off the table. It locks in your profits, while leaving you less susceptible to that company's future performance.

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4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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