Hog the RoadTraffic generally flows better when attentive drivers stay in their lanes. Then a slow-poke comes along to ruin the steady traffic flow causing impatient, and sometimes patient, drivers to change lanes lest an inner urge erupts into a road rage incident. To avoid mayhem, some roads have more than one lane to suit different drivers' propensity for speed. Similarly, fund managers offer options to accommodate different investing styles. Unlike driving in traffic though, you need to hog the road by using many lanes and to change lanes along the way on the road to retirement. Portfolio diversification is all about minimizing the risk of investment. After all, that's why Mad Money lets people ask Cramer "Am I diversified?"
Then Slow DownFirst, you hogged the road. At the risk of being considered an even more inconsiderate driver, then slow down when you get older. Risk is for the hard driving young with a lead foot on the accelerator pedal and time to heal. Conservative works better for the more mature crowd with less time to make up for any potential folly. Investors approaching retirement should tend to prefer certainty that their hard-earned savings will be there when they retire, just in case it happens in the middle of a market storm or just plain at the wrong time of a market cycle.
As you age and approach retirement, gradually shift your portfolio assets away from the risk of stocks and more toward conservative positions in bonds and cash. Consider investing in accordance with the Rule of 100, where you invest a percentage of your portfolio corresponding to your age in bonds and cash and the rest in stock. Whereas a strapping 25-year-old lad would have 25% of his portfolio in bonds and cash and 75% in stocks, a curmudgeonly 70-year-old would squirrel away 70% in bonds and cash and 30% in stocks.A diversified retirement savings portfolio lessens your exposure to risk. Don't count on your instincts to pick winners or time an often capricious and always fascinating market. Follow a portfolio diversification route with which you are comfortable, and adjust accordingly along the way. Then you may concern yourself with selecting the right grade of funds in an upcoming Safety Driving Tip No. 3. This article was written by Richard Schmitt, author of "401(k) Day Trading: The Art of Cashing in on a Shaky Market in Minutes a Day." Outside of his appearances on Fox Business News, KCBS, and Business News Talk Radio, he is an Adjunct Professor teaching retirement planning at the Edward S. Ageno School of Business at Golden Gate University.
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