Baby boomers have 25% of their invested assets in products with fixed returns, according to a recent survey.1 Yet for a generation that plans to redefine retirement by living longer and leading more active lives, fixed-income vehicles alone may not provide the requisite income that allows them to realize their goals.

If you dream of doing more than sipping lemonade in a rocking chair on the porch, you may want to consider the advantages of diversifying your portfolio.

Diversification is a basic principle of successful investing. It involves spreading your money among different investments in an attempt to limit exposure to losses. Essentially, it can be described as “not putting all your eggs in one basket.”

Asset allocation is a systematic approach to diversification based on mathematical models. It involves strategically dividing your portfolio into major asset classes (stocks, bonds, cash) to protect against significant losses and to help reduce volatility. It’s important to diversify not only among the major asset classes, but also within asset classes. For example, the stocks in a portfolio might be separated into 50% small caps, 30% large caps, and 20% international. The chart at the right shows how baby boomers’ assets are currently allocated.

Over time, committing to an asset allocation strategy that is appropriate for your investment goals, time horizon, and risk tolerance could help reduce risk and possibly enhance portfolio performance. In fact, empirical research suggests that as much as 91.5% of a portfolio’s; overall performance is a direct result of how its assets are allocated.2

Diversification does not guarantee against loss; it is a method used to help manage investment risk. The return and principal value of an investment in stocks and bonds fluctuate with changes in market conditions. When sold, these securities may be worth more or less than the original investment amount.

Revisit, Reassess, Rebalance

As your life changes in retirement, you should revisit your asset allocation mix. Over time, the balance of outperforming assets will grow and skew your percentages. Reassess your asset allocation based on your investment goals and income needs. You may need to rebalance your portfolio to maintain your targeted allocation or adjust the percentages to reduce your exposure to volatile investments. You should be aware that rebalancing can result in taxes owed.

Asset allocation and diversification are sound, time-tested principles that can help you pursue your investment goals.

1) Investment Advisor, May 2007
2) Brinson, Singer, and Beebower, “Determinants of Portfolio Performance II: An Update,” Financial Analysts Journal, May—June 1991

Diversify and Conquer