This if vitally important to your financial future and any hope you have for enjoying retirement. So, why do we need to diversify and why is it so important?
Because of a little something called uncertainty. Uncertainty means exactly what you think it means. We have no idea what the future will bring. If you have ever read any ads for investment advice or financial services of any kind, you have seen claims by various individuals and companies for unbelievable returns. How do they make such claims? They are convinced that they see into the future and can predict the price movement of various stocks and indexes. There are two reasons why this just isn’t true.
First of all, if someone found the holy grail of investing and was somehow able to predict price movements with any accuracy at all, they would never tell anyone about it. Nor would they sell the secret for any price. They wouldn’t need to. They would be the wealthiest person on earth.
Second, the market is constantly changing. It is after all, a market with human beings buying and selling. As new information is absorbed into the market, the market itself changes. That’s why trading techniques that once seemed to work, stop working. As more and more people use a specific technique, say moving averages or stochastics or whatever, the effectiveness is diluted and it becomes harder and harder to make money.
The fact of the matter is, that we cannot predict with any certainty, the future direction of the market. While I can tell you that we are in a long-term bear market, I cannot tell you when the market will continue to sell off. It could be weeks, months, years, or maybe just minutes.
The only way to protect yourself from losses like the ones most investors suffered in 2000 is to diversify your assets. If the stock market is fundamentally weak, then the risk of a major market sell-off is more likely and your risk of loss is heightened. So, if the market is weak, what do you invest in? The old 80% stocks and 20% bonds is NOT my idea of diversification. In fact, both of these asset classes are horribly weak and risky right now. Especially with the latest comments from Greenspan about the threat of inflation.
My idea of diversification is a mix of several asset classes. Everything from stocks and bonds (both domestic and foreign), to precious metals, natural resources, inverse funds, real estate, tax liens, mortgages, deeds of trust, and limited partnerships to name a few. Exactly what you invest in and in what quantities depends on your personal feelings about risk and where you currently are with respect to your retirement plans.
Look, I never said it would be easy and it is only fun for those of us who enjoy this sort of thing, but it is vitally important to your financial future that you make it your business. Don’t delay; tomorrow could be the turning point in the markets that finishes off your retirement account.
Next time, we look at the final point, an annual investment check up and rebalancing...
