Imagine if the general manager of your favorite baseball team filled his roster with only pitchers and catchers.
Would that work for you as a fan?
Probably not. Even if they were all among the best in the game, you’d still want the top player in each of the other positions out there working toward a win, not to mention a strong bench to back them up. If your team’s GM was ignoring all the other options available, you’d likely be screaming at your TV or foaming at the mouth on Facebook.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
And yet, if you’re like so many investors, your portfolio may be made up almost exclusively of two kinds of players: stocks and bonds.
Perhaps you’re aware there are other choices out there, but it seems like a lot of work to explore them. Maybe you’ve decided to just go with what you know. Or it’s what your financial professional recommended, and who are you to ask questions?
Typically, most of the portfolios we see when prospective clients come to our office — at least three-quarters of them — are 80% to 100% constructed of stocks and bonds. And when I analyze them, I find they aren’t even very well diversified within the different categories and sectors available.
I get it. Twenty years ago, individual investors had to stick to mostly large-cap stocks and high-grade bonds because their opportunities were limited. But times have changed; the financial industry keeps evolving and creating solutions to suit the needs of individual investors and savers. Diversifying your portfolio no longer means owning a couple of mutual funds and a certificate of deposit.
The 60-40 split wasn’t a bad guideline a generation ago, but it’s outdated — and sticking to such a narrow plan could lead to a big loss if there’s a market correction. So why not take some time to review what you have and scout out a few game changers?
- Annuities. Annuities come in all shapes and sizes and enable contract owners to enjoy some market upside (up to a set cap) but avoid the downside (you won’t earn interest credits but you won’t lose any of your principal). There are immediate annuities and deferred annuities, each with their own benefits and drawbacks. And depending on the annuity there may be additional features such as income or death benefit riders, although it should be noted that those generally come with additional costs.
- Exchange-traded funds (ETFs). The most common ETFs are designed to track the performance of a market benchmark or index, such as the S&P 500, the Nasdaq or the Russell 2000. An ETF is a diversified collection of assets (like a mutual fund) that trades on an exchange (like a stock). ETFs are growing in popularity because they’re easy to use, low in cost and tax efficient. And they’re evolving — many now involve much more than just benchmark mirroring.
- Real estate. It’s getting easier for everyday investors to include real estate holdings in their portfolios. You don’t have to be a landlord fixing toilets at midnight or sit on a piece of land for years. You can put your money into a real estate investment trust (REIT), a company that owns income-producing real estate (warehouses, office parks, shopping centers, etc.). The combination of current income and long-term growth potential may make a REIT worth looking into, especially for a retirement plan.
- Life insurance. The insurance industry continues to come up with new products to appeal to consumers. Though many still think of life insurance strictly as a way to take care of loved ones when they die, it can be an important player on your financial team. While not a replacement for long-term care insurance, some policies offer accelerated death benefits if the holder has a terminal, long-term or incapacitating illness that requires specialty care. There also are policies that offer income tax free loans from which you can pull money in retirement. However, as with other financial vehicles, policy loans and withdrawals will reduce the available cash values and death benefits and may cause the policy to lapse.
- Emerging and foreign markets. These investments have been around for a while, but they’re gaining in popularity as awareness of our global economy grows. As U.S. interest rates rise, some investors appear to be looking overseas to generate returns.
- Management styles. Just as the definition of diversification is changing, so is the way managers handle money. Buy and hold isn’t always the way to go anymore; tactical asset allocation is a more active management style that shifts the holdings in various categories to build and, perhaps more important, preserve a portfolio as the market changes.
Of course, an important factor for any winning franchise is how the team members play together — so talk to your financial adviser about the role some of these strategies might have in your portfolio. Each should have a purpose you understand and fit within your comfort level. Then you can decide if there are some changes you want to make to your roster.
Kim Franke-Folstad contributed to this article.
-
Ten Retirement Tax Plan Moves to Make Before December 31Retirement Taxes Proactively reviewing your health coverage, RMDs, and IRAs can lower retirement taxes in 2025 and 2026. Here’s how.
-
The Best (and Worst) Airlines for Flight Delays and CancellationsWhich airlines should you book and which should you avoid if you want to make it to your destination on time?
-
Parents and Caregivers: Don't Miss Your Roth Conversion WindowCaring for a child or parent can mean a drop in income and a lower tax bracket. Why not take advantage by moving money into a Roth account? Here's how it works.
-
Testing the Retirement Waters in Florida? A Partial Plunge May Negate Tax BreaksMost folks know Florida is a tax-friendly state, but they might not know that part-time residents may not qualify, as our cautionary tale shows.
-
Catch-Up Contributions for Higher Earners in 457(b) Plans: What You Need to KnowGovernment 457(b) plans are about to get more complex as new Roth catch-up requirements come into force. Here's how to prepare for the changes.
-
I'm a Financial Planner: This Is Why Commitment, Not Perfection, Drives Financial SuccessMeeting your goals is more likely if you stick to your strategy despite market volatility and scary headlines. Consistency makes a difference.
-
I'm a Financial Professional: This Is Why Now Is the Time for Investors to Look AbroadExtreme U.S. market concentration has made international equities not just a diversification play, but a timely opportunity.
-
Four Ways to Make the Most of Your Benefits During Open EnrollmentOpen enrollment is a chance to make sure you're getting every ounce of value from your workplace benefits and on track to reach your long-term financial goals.
-
Your Estate Plan Isn't 'Done' Until You've Completed These Five Steps, From an Estate Planning AttorneyCongratulations on getting your estate plan in order. Now, you need to communicate the relevant details to ensure your plan is effectively carried out.
-
A Nightmare for Parents: How to Navigate the Legal Boundaries of Tenant Rights During a Family CrisisThis family's story illustrates how important it is to get help sooner rather than later and highlights the complexities of tenant rights and legal protections.
