I have spent 14 years in the financial services industry in various capacities, and if I have learned one thing in that time, it’s that you shouldn’t put all your eggs in one basket.  You have probably heard this saying your whole life, and there’s a good reason that what your mother, father, or grandparent told you holds especially true today.

First let’s look at the old stand-by of diversification. Whether it is  mixing up your money 60% in this pile and 40% in that pile; 75% here and 25% there, the outcome is essentially the same.   I often visit with clients that feel they have diversified properly because they have four separate Mutual Funds. They’re surprised to find out they have four Large Cap funds that hold 75% of the same stocks. The key here is that your money is still at risk for adverse market conditions.  I propose using a mixture of insurance products with bonds to ensure stability of your income, adding in equities to avoid forfeiting your growth opportunity.  

Many of my prospective clients say the same thing: “If the markets go down, I simply will not take any money out.”  Unfortunately, you may not have any choice in the matter!  First of all, if you have budgeted to use income from your portfolio, chances are you won’t be able to afford the pay cut when the market goes down and it’s the least optimum time to sell your shares.  What if your health deteriorates and you need the money from your portfolio to pay out-of-pocket costs for long-term care?

The second and most important factor is whether your portfolio is held in an IRA.  If you have an IRA, Uncle Sam does not care if you don’t want to take your money out because the market is down.  Uncle Sam wants the taxes he’s owed, and he wants them now!  You lose the ability to buy low and sell high, because Uncle Sam in in control of when you have to sell your securities… Not you!

Imagine this; you have a portfolio in an income-producing asset that does not change if the market goes down, so your standard of living never has to change.  The money you take out qualifies as your required minimum distributions from your qualified account, and you have other assets invested so you can take advantage of any market growth. This way, if the equities increase in value and you would like to reallocate a little bit of the profit to income-producing assets, you can. You choose when you sell your securities--not Uncle Sam.

One part of a fully-functional financial plan is to expect the best but plan for the worst.  It’s best to take a portion of your assets and ensure you don’t spend all of them paying for your own care, leaving your spouse impoverished!  It’s possible to carve out a portion of the assets invested and get a reasonable rate of return, all the while increasing your money, should you need long-term care.  Many of these accounts are very affordable and some of the policies pay as much as four times the amount of money you have in these accounts, in the unfortunate event you should need long term care.  

If planning unlocks financial security, then diversification is the golden key!


You can read more from Shane Earle at http://www.senioradvisorygroupllc.com/