May 31, 2023

Is Your Portfolio in Need of a Makeover?, #151

15 minutes

My home state of Connecticut was ranked the second worst pension fund performer of the past five years. Maybe you’ve had some tough hits to your retirement portfolio over the years too, and are in desperate need of a financial makeover. On this episode, I want to help you avoid Connecticut’s mistakes and ensure your portfolio is set up for retirement success.

You will want to hear this episode if you are interested in...

What is your asset allocation? [2:54]
The power of diversification [6:53]
Comparing active portfolio management to index funds [11:27]

Understanding proper asset allocation

One of the biggest mistakes the State of Connecticut made to earn its pension fund performance the second worst spot was asset allocation. Having proper asset allocation means you are well diversified in the asset classes you invest in. The three main classes are stocks, bonds, and cash, but other assets include real estate, commodities, and private equity investments.

It’s important to have exposure to all of the different asset classes because history has shown a diversified portfolio maximizes your returns while protecting you from catastrophic losses. Additionally, the amount you keep invested between risky and conservative investments will determine your potential return. Growth-oriented asset classes like stocks, real estate, and commodities have the highest chance to both make and lose money, whereas cash and bonds are the more conservative investment.

Digging into diversification

Investing in different asset classes isn’t enough. You need diverse investments as well! Connecticut did poorly because it had too much money in only a handful of investments that did not perform. If you're heavily concentrated in small-cap, large-cap, or international stocks, think about diversifying across the different sectors of the market.

My recommended diversification strategy for stocks is having a large-cap, mid-cap, and small-cap stock fund. The sizes represent the worth of the company determined by taking the price of their stock times the number of shares. The resulting number represents that company’s market capitalization. You need all three because markets move at different times, and you want to take advantage of every opportunity. Round out your portfolio with some international and emerging market investments, and your stocks will be good to go. Listen to this episode for more on giving your portfolio a makeover!

Resources Mentioned