|
E-mail this page to a friend!
Guarding Your Wealth for Seniors
Don’t Scramble Your Eggs When Investing
By Jeffrey D. Voudrie, CFP
Jan. 5, 2006 - Financial advisors have been preaching the use of
portfolio diversification to reduce risk for years. Unfortunately, the
way most do it leaves your portfolio vulnerable! Read on to find out how
to properly diversify your portfolio.
We’ve all heard that it’s not wise to put all of
your eggs in one basket. For safety, we are told that it is better to
divide our eggs among several baskets because if one gets dropped it
isn’t going to break all our eggs. Wall Street refers to this as
diversification.
Many people think that if they own more than one
investment that they are diversified. Others think that diversifying
means that they should not keep all of their money with one institution
or the same advisor. This isn’t diversification.
The egg analogy doesn’t accurately reflect the
underlying reasons for diversification. There are many different risks
we face. There is market risk, interest rate risk, credit risk and
inflation risk, just to name a few. The purpose of diversification is to
help you reduce your exposure to all of these risks, not just one or two
of them.
There’s no such thing as the Perfect Investment.
EVERY investment has risks and rewards. Combining investments with
different risks and rewards can result in the reward of one offsetting
the risk of another.
Here’s a simplified example. Many retirees
recognize that there is greater risk of losing their principle when
investing in the stock market then there is in a Certificate of Deposit
(CD). As a result, many choose to avoid the stock market all together.
Neither CDs nor a stock market investment are
perfect. The reward of CDs is their stability. But they aren’t designed
to protect you from inflation risk. A stock market-based investment is
designed to protect you from inflation risk but it lacks the stability
of the CD.
That’s where diversification helps. Spreading your
money among both CDs and stock market-based investments is a way to
reduce the risks associated with each. Doing so reduces the overall risk
of your portfolio and increases the probability that you will achieve
your goals.
Spreading your portfolio between CDs and stocks
won’t adequately protect you from all the risks you face. Portfolios
should be divided among cash, bonds, real-estate and equities, further
sub-divided into different classes and then the classes into different
investments. Many advisors do this but that’s where they stop…and fail.
Most advisors fail to properly diversify a
portfolio by strategy. If your entire portfolio is based on the same
strategy then your entire portfolio is exposed to the risks associated
with that strategy.
Probably 98 out of 100 advisors will tell you that
the Buy and Hold strategy is the only successful way to invest in the
stock market. Doing so puts YOU at risk. That’s why so many investors
suffered losses of 30-50% or more between 2000 and 2002. The problem
wasn’t the type of investment, the problem was the advisor failed to
diversify your portfolio by strategy.
There are many different strategies available. I’m
not sold out to any single strategy. Just like investments, each
strategy has strengths and weaknesses. That’s why I diversify clients
between different types of investments AND different underlying
strategies.
I’ll use a Buy and Hold strategy, but I will offset
its risks with a proprietary strategy designed to significantly reduce
stock market losses. I use traditional investments but I also find other
ways to meet my client’s needs. I develop different strategies to meet
different needs—diversifying along the way.
For instance, one of my high-income strategies uses
a type of investment unfamiliar to most advisors (because they can’t
earn a commission on them). To reduce risk, it’s diversified among 20
individual investments. Three of them lost money in 2005—one lost 29%!
The other 17 more thn made up for that, though, with 7 having gains over
40% each. As good as this strategy is, I’ll only use it for a portion
of a portfolio.
Diversification can be used to reduce the specific
risks your portfolio faces. Use different categories, classes and
individual investments. And make sure that you use more than one
strategy. Doing so will help you protect what you have and make it grow.
If you have a specific question or would like more
information give me a call toll-free at 1-877-827-1463 or go to
www.guardingyourwealth.com. You can also reach me by email at
jeff@guardingyourwealth.com.
About Guarding Your Wealth:
“Guarding Your Wealth” is a
nationally syndicated weekly personal finance column written by Jeffrey
D. Voudrie, CFP. Mr. Voudrie is the President of Legacy Planning Group,
a private wealth management firm that employs sophisticated proprietary
strategies designed to protect and grow its clients' investments. Please
visit his website,
www.guardingyourwealth.com to read past articles under the Guarding
Your Wealth Article Archive.
Guarding Your Wealth for Seniors are
a collection of columns by Voudrie that deal with issues of particular
interest to senior citizens. Click here
for all columns.
In addition to being a nationally
syndicated columnist and Certified Financial Planning Practitioner, Mr.
Voudrie provides personal, private money management services to clients
nationwide.
Looking for an energetic expert who
is passionate about financial and wealth management? Mr. Voudrie is an
excellent speaker who will excite and inspire your audience. Mr. Voudrie
is available for a limited number of speaking engagements, television
appearances and radio talk shows. For booking information, email e-mail
protected from spam bots.
Click here to Search SeniorJournal.com for more on
this subject
Click to More Senior News on the
Front Page
Copyright: SeniorJournal.com |
