Bear-proof your Retirement Portfolio

This article is by Eric Petroff. Diversification is one of the most fundamental concepts in financial planning. I highly recommend that your read and learn. Nowadays in the information age, power belongs to the ones with the most knowledgeable and open minds and to the ones who put this knowledge into action. Happy reading!

It is simply a reality that market conditions play a significant role in retirement planning for almost everyone. Generally speaking, the more diversified you are, the less impact market events will have on your retirement plans.

If you happen to retire immediately before a prolonged bull market, there really isn't anything to worry about. However, if you end up retiring prior to a bear market, your retirement dreams could crumble if your portfolio is unprepared. Regrettably, there is no way to determine if you''ll be retiring into either a bull or bear market. With that in mind, let''s take a look at how to prepare your portfolio no matter what the market throws at you.

Rate of Spending vs. Rate of Return
 To begin, keep in mind that a successful retirement portfolio is one that provides a steady and growing stream of income. To accomplish this, you must set a realistic and sustainable spending rate - the percentage of your portfolio that you remove each year to pay for living expenses. The spending rate must allow your portfolio''s growth to offset inflation. Generally speaking, most investment professionals would consider a 4-5% spending rate to be a realistic target, implying a total return needed of 6.5-7.5%, assuming 2.5% inflation.
In order to achieve this rate of return, a substantial allocation to equities is necessary; probably about 50% of your portfolio. Unfortunately, when you shift from fixed income into equities, you significantly increase your portfolio''s overall risk. This increased risk translates market value and spending volatility.
Retirement certainly isn''t a time when you want to have huge swings in your income level. Because there is no way to know in advance if you''re retiring into a market upturn or downturn, it is best to prepare your portfolio by seeking as much diversification as possible.

How To Get There
Fortunately, achieving a meaningful level of diversification really isn''t all that hard as long as you keep a few fundamental ideas in mind.

1. Don't rely on individual stocks and bonds. Individual investors (and brokers) are sometimes ill-equipped to research and monitor enough individual securities to provide proper diversification. Serious investors, like colleges and foundations, hire money managers (or mutual funds) to achieve diversification. Take a lesson from them.

2. Never use a single mutual fund family regardless of how good it seems. Generally speaking, mutual fund families tend to have a consistent investment process across their products even though the names of their funds are different. Though their process may be worthwhile, having professionals with different viewpoints on investing is another essential aspect of diversification.

3. Don''t put all of your money in one style of investing such as value or growth. These investment styles will go in and out of favor depending on market conditions. Diversifying against these market trends is very important, as these trends can easily last five years or more and produce vastly different rates of return.
In addition to these diversification tips, you need to be extremely conscious of fees because they represent a structural impediment to success. For example, retail mutual funds may charge 1-2%, and brokers may charge 1-2% as well for wrap accounts. This means total fees can be between 2-4% per annum, which comes directly out of your investment performance. One great way to avoid fees is through an index fund provider or ETFs, which can generally provide a fully diversified portfolio for about 0.50%. Moreover, by investing in index funds you will achieve very broad degrees of diversification within a given asset class.

Conclusion
It is essential for investors to realize that market conditions, and timing thereof, can play a major role in their retirement plans. Since it is impossible to anticipate how markets will behave, diversifying your assets is simply the most prudent course of action. Take an active role in your portfolio, and do it by diversifying your assets and picking good mutual funds in which to invest your money. Such activities are most likely the best use of your time.