Is financial diversification overrated?

[Billy Cox]

Most financial gurus recommend that an investment portfolio be balanced between 'safe' and riskier investments depending on the time remaning before one reaches the magical age at which 'everybody' retires.

I have this question... Considering that via their home, most Americans are heavily invested in residential real estate, which over the long term is very safe, does it make sense to further diversify one's retirement savings into investments yielding single digit rates of return? Is it possible that homeowners under the age of 50 should be investing far more aggressively than conventional wisdom tells them?

[Dave McClung]

Most financial gurus recommend that an investment portfolio be balanced between 'safe' and riskier investments depending on the time remaning before one reaches the magical age at which 'everybody' retires.

I have this question... Considering that via their home, most Americans are heavily invested in residential real estate, which over the long term is very safe, does it make sense to further diversify one's retirement savings into investments yielding single digit rates of return? Is it possible that homeowners under the age of 50 should be investing far more aggressively than conventional wisdom tells them?

Without a question, the "school book" apporach to diversification is over rated. About 20 years ago, I hired a certified financial advisor to review my investments. When he saw that I had almost 50% of my net worth in privately held stock, he almost panicked. He advised that I have no more than 15% in privately held stock.

What he ignored was the fact that I had a lot to do with how profitable that stock would be. It was in the stock of the company of which I was the CEO.

Personally, I don't invest in bonds. I invest in noload mutual funds, the stock of privately held corporations and in real estate. It has worked for me.

That being said, I have a friend who has almost all of his net worth tied up in his privately owned corporation. It is his employer. Due to current economic conditions, his company has failed. He now wishes that he had diversified more.

[Kelly R Davis]

Most financial gurus recommend that an investment portfolio be balanced between 'safe' and riskier investments depending on the time remaning before one reaches the magical age at which 'everybody' retires.

I have this question... Considering that via their home, most Americans are heavily invested in residential real estate, which over the long term is very safe, does it make sense to further diversify one's retirement savings into investments yielding single digit rates of return? Is it possible that homeowners under the age of 50 should be investing far more aggressively than conventional wisdom tells them?

Billy,
There are alot of factors to consider when thinking about your retirement savings. Diversifaction is just one factor. One must consider income demands and risks tolerance. Also you need to consider what percent of one's net worth do these retirment dollars represent. The bigger question for alot of 50 year old is not how are they investing but how much are they saving?

[Billie Goodson]

Most financial gurus recommend that an investment portfolio be balanced between 'safe' and riskier investments depending on the time remaning before one reaches the magical age at which 'everybody' retires.

I have this question... Considering that via their home, most Americans are heavily invested in residential real estate, which over the long term is very safe, does it make sense to further diversify one's retirement savings into investments yielding single digit rates of return? Is it possible that homeowners under the age of 50 should be investing far more aggressively than conventional wisdom tells them?

I think the key is in the last sentence your wrote -- if age is the only factor. Allow me to explain, if one assumes that when you say an age (you said "50"), then there is an unstated assumption that there is probably some age at which retirement is sought/expected. So, if I assume correctly, your statement would be in reference to someone who is within about 15 years of retirement (assuming 65). My thoughts are more that someone divide their working life into something like 1/3's. For the first third, you invest a little (more is better, but some are too consumed with little income/high expenses). The second third is when you realize you screwed up on the first third so you need to more aggressively invest and can withstand higher risk strategies. The last third is when you are nearing retirement and should begin to decrease your risk while continuing to invest heavily. The decreased risk can be somewhat mitigated by diversification in somewhat more risky areas. What you don't want to do is enter the last third with a significant exposure to a bad turn. Not sure that any strategy can avoid catastrophes, because if you could avoid them, they simply would not exist.

If one entered the market at a young age and aggressively invested and was profitable, then the magic age of retirement could be moved nearer career entry, which is what many of us never allow for, which is the saddest part. When I first began my career, I thought I couldn't invest because of my family situation, that was a mistake that cost me several years.

So, on the topic of diversification -- I kind of think it is like a golf swing. It doesn't matter if you swing correctly or not, it only matters how the club face lines up with the ball at the moment of impact. Diversification is not as important as active management and attention. But, since most of us lack those two ingredients, then the planners always punt to diversification.

[Billy Cox]

So, on the topic of diversification -- I kind of think it is like a golf swing. It doesn't matter if you swing correctly or not, it only matters how the club face lines up with the ball at the moment of impact. Diversification is not as important as active management and attention. But, since most of us lack those two ingredients, then the planners always punt to diversification.

Most financial advisors in print seem to assume that the majority of one's net worth is in investments like mutual funds or stocks, but if someone fails to save boatloads of money during their peak earning years, their net worth is probably found mostly in their home.

[Billy Cox]

Without a question, the "school book" apporach to diversification is over rated. About 20 years ago, I hired a certified financial advisor to review my investments. When he saw that I had almost 50% of my net worth in privately held stock, he almost panicked. He advised that I have no more than 15% in privately held stock.

What he ignored was the fact that I had a lot to do with how profitable that stock would be. It was in the stock of the company of which I was the CEO.

Personally, I don't invest in bonds. I invest in noload mutual funds, the stock of privately held corporations and in real estate. It has worked for me.

That being said, I have a friend who has almost all of his net worth tied up in his privately owned corporation. It is his employer. Due to current economic conditions, his company has failed. He now wishes that he had diversified more.

I'm curious as to how feasible it is to rely on dividend income to make ends meet post-retirement. I haven't run the numbers to see how much of a stock I would have to own in order to replace the income from a job. I suspect that it's a very large number.

[Dave McClung]

I'm curious as to how feasible it is to rely on dividend income to make ends meet post-retirement. I haven't run the numbers to see how much of a stock I would have to own in order to replace the income from a job. I suspect that it's a very large number.

To calculate how much you would need to live on dividends use this formula --
Figure how much you will need to live, subtract how much you will receive from social secutity and pension plans, then multiply the remainder by 25.

Example: Suppose that you need $50,000 a year to live. You will get $22,000 from social security and have no pension. You would need a portfolio of $38,000 X 25 = $950,000.

Most Americans who have $950,000 in assets can't afford to live on $50,000 a year, so the answer is that it is almost impossible to retire on dividend income alone.

[Billy Cox]

To calculate how much you would need to live on dividends use this formula --
Figure how much you will need to live, subtract how much you will receive from social secutity and pension plans, then multiply the remainder by 25.

Example: Suppose that you need $50,000 a year to live. You will get $22,000 from social security and have no pension. You would need a portfolio of $38,000 X 25 = $950,000.

Most Americans who have $950,000 in assets can't afford to live on $50,000 a year, so the answer is that it is almost impossible to retire on dividend income alone.

Actually, the difference between $50,000 and $22,000 is $28,000, not $38,000. So the portfolio would need to be $700,000. Still not an amount that one can find in their sofa cushions.

So an average dividend would be in the 4% range?

[David Lyons]

"financial diversification"

Well, I have spread my "investments" around to General Motors, the US Student Loan program, and a vacation club, as well as a number of other things. The best return on investment I have had is the money I spend on my wife.

BTW, I recently received a statement from my retirement account in another denomination I was with. If I understand it correctly, I now am in debt for retirement!

[Dave McClung]

Actually, the difference between $50,000 and $22,000 is $28,000, not $38,000. So the portfolio would need to be $700,000. Still not an amount that one can find in their sofa cushions.

So an average dividend would be in the 4% range?

My math was wrong, but the point was still valid. Thanks for correcting it.

[Billie Goodson]

Actually, the difference between $50,000 and $22,000 is $28,000, not $38,000. So the portfolio would need to be $700,000. Still not an amount that one can find in their sofa cushions.

So an average dividend would be in the 4% range?

I think an annual yield of 4% from dividends would be astronomical in the market. At least it seems that way if you look at the S&P Dividend Aristocrats.

[Dave McClung]

=
So an average dividend would be in the 4% range?

The average dividend for companies listed in the DOW is 2.8%; however, many pay very little. An investor seeking dividends can select from companies that have a history of paying dividends. A quick search of the internet shows that most of the sites quote a range of 3% to 5% as a reasonable level to expect.

[Billy Cox]

My math was wrong, but the point was still valid. Thanks for correcting it.

I work with sales people, so I'm conditioned to home in on inflated numbers.

[Kevin Rector]

Windstream (WIN) has a history of paying very good dividends. Their annualized dividend yield for the last year was 8.12%. Also because of their business I think that eventually they might make a ripe target to get bought by a larger telco.