# Building A Portfolio For Retirement Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2021-07-09 Category: INVESTING Category URL: https://financedigest.com/category/investing Meta Title: Maximise Your Retirement Portfolio with Proper Investment Meta Description: Learn from Anthony Watson, Founder of Thrive Retirement Specialists, why proper diversification in your investment portfolio is crucial for minimising risk and URL: https://financedigest.com/building-a-portfolio-for-retirementhtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/1-1736838201864-compressed.jpg) By: Anthony Watson, Founder [Thrive Retirement Specialists](https://thriveretire.com/) Your investment portfolio is likely one of the primary assets you plan to rely upon to fund your retirement. As such, your investment portfolio must be structured and managed properly. No longer can you take the cavalier approach you once could when you were younger and saving for a time way off in the distant future. An [investment portfolio](https://www.financedigest.com/three-fundamental-tips-to-enhance-your-investment-portfolio-performance.html "Three fundamental tips to enhance your investment portfolio performance") should begin to look differently heading into retirement for several reasons. First, volatility becomes much more of a risk factor as sequence-of-returns-risk is highest [early in retirement](https://www.financedigest.com/how-to-retire-early.html "How to retire early") when the portfolio is largest. The key to minimizing volatility and reducing sequence-of- returns risk is to ensure your portfolio is well constructed and diversified. Second, you cannot afford to take concentrated risks to try and hit home runs anymore because there is less time to rebound from mistakes now. Lastly, since you can’t swing for the stars when it comes to returns anymore, keeping as much of the return as you can becomes more critical. This means paying attention to fees that can eat away at your returns. **Portfolio Diversification** Diversification is an often misunderstood concept.  Someone with just a single index fund could be more diversified than someone with 100 individual stock holdings.  Diversification has nothing to do with the absolute [number of holdings](https://www.financedigest.com/tennis-williams-retirement-on-hold-after-win-over-world-number-two.html "Tennis-Williams retirement on hold after win over world number two") but rather the asset class exposures each holding represents.  I believe there are nine distinct asset classes a person should have exposure to be maximally diversified: 1). U.S. Total [Stock Market](https://www.financedigest.com/the-secret-to-stock-market-success.html "The Secret to Stock Market Success"), 2). U.S. REITS, 3). [Developed Markets](https://www.financedigest.com/concrete-placing-booms-market-notable-developments-geographical-outlook.html "Concrete Placing Booms Market: Notable Developments & Geographical Outlook") Europe, 4). [Developed Markets](https://www.financedigest.com/marine-base-steering-gear-market-notable-developments-geographical-outlook.html "Marine Base Steering Gear Market: Notable Developments & Geographical Outlook") Asia-Pacific, 5). [Emerging Markets](https://www.financedigest.com/the-emergency-immobilizers-market-to-be-digitally-instilled.html "The Emergency Immobilizers Market to be digitally instilled"), 6). U.S. Total [Bond Market](https://www.financedigest.com/britains-bond-market-turmoil.html "Britain’s bond market turmoil") (investment grade), 7). Total International [Bond Market](https://www.financedigest.com/inflation-fears-grip-markets-as-bonds-stocks-plunge.html "Inflation fears grip markets as bonds, stocks plunge") (investment grade and U.S. dollar hedged), 8). U.S. TIPs, and 9). U.S High Yield [Corporate Bonds](https://www.financedigest.com/green-bonds-are-set-to-drive-corporate-esg-debt-out-of-slump-in-2023-barclays.html "Green bonds are set to drive corporate ESG debt out of slump in 2023 -Barclays") (non- investment grade). Noticeably absent from this list are [alternative investments](https://www.financedigest.com/investing-in-the-future-with-alternative-web-data.html "Investing in the future with alternative web data"), commodities, and cryptocurrencies.  Alternative assets are non-traditional investments like [hedge funds](https://www.financedigest.com/what-is-a-hedge-fund.html "What Is A Hedge Fund") and private equity. Alternative assets are complex, loosely regulated, opaque, and expensive investments that seldom [yield a return commensurate with their true risk](https://www.financedigest.com/euro-zone-bond-yields-fall-as-ecb-policymaker-flags-recession-risk-gilts-eyed.html "Euro zone bond yields fall as ECB policymaker flags recession risk, gilts eyed"). Commodities are hard assets that do not produce a stream of income. As such, commodities are not worth including in a portfolio because they can’t be [expected to provide the portfolio with a positive return](https://www.financedigest.com/lufthansa-expects-further-significant-improvement-after-return-to-profit.html "Lufthansa expects further ‘significant improvement’ after return to profit") above the inflation rate. Cryptocurrencies aren’t even an asset. Not only do they not generate income, but they also can’t even be used as raw material to build something of value. Nine asset classes may not sound like a lot, but incredible diversification can be achieved through the right vehicles.  For instance, using broadly defined index funds to represent each of the nine asset classes, one can build a maximally diversified portfolio giving them exposure to over 36,000 individual securities across all investable 44 countries. **Adopt a Passive Investment Philosophy** There is a [reason professional investors from Warren Buffet to the late John Bogle champion the benefits of passive investing](https://www.financedigest.com/5-compelling-reasons-that-you-should-invest-in-branding.html "5 Compelling Reasons That You Should Invest In Branding"). There are many tangible and intangible [benefits to reap](https://www.financedigest.com/uk-tourism-sector-already-reaping-the-benefits-of-brexit.html "UK TOURISM SECTOR ALREADY REAPING THE BENEFITS OF BREXIT") from adopting a passive investment philosophy. First, individuals can often save more than 1.00% alone based on the average expense ratios of the funds being held in a portfolio. Based on the average expense ratios listed in the Investment Company Institute’s® 2020 Factbook, a 50% [stock and 50% bond](https://www.financedigest.com/stocks-bonds-extend-rally-on-hopes-rate-hikes-ease.html "Stocks, bonds extend rally on hopes rate hikes ease") portfolio would carry an average expense ratio of 1.18%. Using only low-cost index funds, you can build an efficient, diversified portfolio like the one previously discussed for a weighted average expense ratio of less than 0.10%. This 0.90% difference drops right to the [bottom line](https://www.financedigest.com/why-investing-in-wellbeing-can-boost-your-bottom-line.html "Why investing in wellbeing can boost your bottom line") of your return. Second, a passive investment strategy requires less trading than an active investment strategy, [leading to lower transaction costs and greater](https://www.financedigest.com/move-over-pcl-greater-londons-suburbs-take-the-lead-this-summer.html "Move over PCL, Greater London’s suburbs take the lead this summer") tax efficiency. Lastly, a passive [investment strategy](https://www.financedigest.com/investing-in-a-first-party-data-strategy-can-save-the-day-for-retailers.html "Investing in a first-party data strategy can save the day for retailers") is easier to understand and implement, eliminating much investor stress and anxiety. No one has a [crystal ball](https://www.financedigest.com/2017-spanish-property-market-gems-kyero-com-gazes-into-the-crystal-ball.html "2017 Spanish property market gems – Kyero.com gazes into the crystal ball") to predict what will happen in the short term.  But over a longer time period, investment returns tend to behave much more predictably as the risk-return relationship plays out. All investments have a specific risk and return profile that they eventually follow.  This concept is known as reversion to the mean.  The problem is it is very difficult to time this reversion, so it does not make economic sense to [pay extra money in the form of a higher expense ratio to bet on active managers](https://www.financedigest.com/with-the-right-active-manager-you-really-do-get-what-you-pay-for.html "With the Right Active Manager, You Really Do Get What You Pay For"). Even if you could predict what could happen, you would have to predict when it will happen and how [markets would react to the event](https://www.financedigest.com/event-management-software-market-to-rise-steadily-at-a-cagr-of-14-1.html "Event Management Software Market to rise steadily at a CAGR of 14.1%"). You can see where the probability of success shrinks with each active bet. **Minimize Your Total Cost of Investing** There are two components to your total cost of investing.  The first component is your portfolio’s weighted average expense ratio.  The second [component is your financial advisor’s management](https://www.financedigest.com/lei-not-a-garland-from-hawaii-but-a-foundational-risk-management-component.html "LEI: Not a garland from Hawaii but a foundational risk management component  ") fee (assuming you use one).  Every mutual fund or exchange-traded fund (ETF) charges what’s known as an expense ratio.  A fund’s expense ratio is not an explicit charge you pay; instead, it is a portion of the return held [back by the fund](https://www.financedigest.com/norway-sovereign-fund-backs-teck-resources-in-battle-with-glencore.html "Norway sovereign fund backs Teck Resources in battle with Glencore") company to pay their expenses.  Fund expense ratios can be as low as 0.02% or as high as 3.00% or more in some cases, and these fees can end up taking a massive bite out of your return.  To figure out your weighted average expense ratio, you will need to look up each holding you have in your portfolio and the weight of that holding within your portfolio.  You can then calculate your weighted average.  The [next component is your financial advisor’s management](https://www.financedigest.com/workforce-management-the-next-cloud-resource-for-businesses.html "Workforce management; the next cloud resource for businesses?") fee (if you use one).  Now, let me say that I believe advisors add value to their clients in many ways, but the [price you pay](https://www.financedigest.com/shell-energy-to-pay-for-overcharging-price-cap-customers-ofgem.html "Shell Energy to pay for overcharging price cap customers -Ofgem") for that value can vary greatly.  Taking the time to understand how your advisor is compensated, if you don’t already know, will help you determine this component.  Some advisors charge commissions, some charge a % of [assets under management](https://www.financedigest.com/asset-managers-on-alert-after-whatsapp-crackdown-on-banks.html "Asset managers on alert after ‘WhatsApp’ crackdown on banks"), and some a flat fee. These tried-and-true strategies may not be “fun and exciting,” but there is less time to recover from mistakes now. It can be hard giving up that Apple, Tesla, or Amazon stock, but a large permanent drop in a single security that represents a material portion of your portfolio can cause irreparable damage to the sustainability of your retirement [plan](https://www.financedigest.com/should-i-roll-my-old-retirement-plans-into-a-roth.html "Should I Roll My Old Retirement Plans into a Roth?") once you retire. Who would have thought it possible that General Motors, once the largest company in the U.S., could go bankrupt? But they did. Remember Enron? They looked like an excellent investment until the accounting scandal. Stay away from company-specific risk that can be diversified away using a low-cost, diversified index fund portfolio. --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---