Retirement planning is essential for anyone who wants to ensure freedom and stability once they stop working. A retirement plan involves saving and investing for the future, and that inevitably involves risk. So how can expats in Asia plan for a secure retirement without exposing themselves to excessive risk? The answer is diversification.
What is diversification?
The investment landscape is made up of different asset classes, including equities, bonds, real estate, derivatives, currencies, commodities, and cash.
Diversification is one of the fundamental principles of investing. It is achieved by allocating your investments across these different asset classes to balance risk and reward.
Put simply, diversification is not putting all your investment eggs in one basket!
Your asset allocation strategy should be linked to your overall retirement goals, your investment timeframe, and your tolerance to risk.
Many experts claim that how you choose to allocate your assets is a much more important determining factor influencing returns than your choice of specific stocks or funds.
Why diversification is important for retirement planning?
Historically, different asset classes have not moved up and down at the same time. Many different factors affect performance and when market conditions cause one asset class to perform badly, they may positively influence a different asset class.
Investors can protect themselves from volatility by spreading their investments amongst the different asset classes. Potential losses in one asset class can be offset by potential gains in another.
No asset class is impervious to risk (not even cash) but careful asset allocation can help to mitigate risk by smoothing out fluctuations in the performance of the different asset classes.
That’s why a well-diversified portfolio is crucial for investment success.
The risk of not diversifying your investments
To give a simplified example, let’s say you got caught up in the Bitcoin hype in August 2021 and decided to invest all your money in the cryptocurrency when one Bitcoin was worth $47,124. In November 2021, you would have felt pretty pleased with yourself as Bitcoin peaked at $68,789. That’s some return over a three-month period.
You might be feeling less smug now though. As I write, bitcoin has dipped below $27,000, representing a significant loss on your initial investment.
This is an extreme example but illustrates the point that when it comes to investment, putting all your eggs in one basket is a very bad idea.
An investment portfolio that concentrates on one asset class is far riskier than one where investments are spread across different asset classes. It leaves no alternative investments to mitigate against losses incurred.
With volatility high in the markets right now, it’s even more important than ever to diversify your investments.
Diversifying within asset classes
Diversification occurs between different asset classes but to capitalise on growth opportunities you should also aim to diversify within an asset class by investing across various industries, sectors, and regions.
By doing so you will increase your chances of benefitting from the growth of successful investments while offsetting losses in underperforming sectors.
Here is an example of how this can be achieved.
How to diversify your retirement portfolio
Remember that the aim is to maximise return while minimising potential risk by spreading your investments across different asset classes. The massive peaks and troughs of some will be offset by the less volatile ups and downs of others.
Assessing your tolerance to risk is key when deciding on the allocation of your assets. If time is on your side and you don’t mind exposing your investments to risk, you could invest more in shares such as trackers which offer a greater potential upside but little protection against the downside. Over the long term, if you stay invested and avoid panic-selling, any losses are likely to turn out to be a mere blip in the upward trajectory of your investments and you will benefit from overall market growth over an extended period.
However, if your investment goals are shorter term – perhaps retirement is approaching, or your child is coming up to university age and high tuition fees are looming – then you don’t have time to recover from the hit of a loss and need to be more cautious in your approach
There is no one-size-fits-all answer which is why you should get professional advice to put together a bespoke financial plan.
Help with diversification for retirement planning
An Infinity financial adviser will help you clarify your financial goals and investment timeframe using cash flow forecasting software. They also have tools to help you work out your tolerance to risk and ensure that you are investing accordingly.
Infinity has an exclusive partnership in Asia with Evelyn Partners, the UK’s leading integrated wealth management and professional services group. Our advisers work closely with Evelyn and offer access to highly diversified retirement planning solutions tailored to your needs. Together we are a dream team working together to make your retirement dreams a reality.
Contact us today to discuss your retirement planning requirements and plan for a bright future.
A leading provider of expat financial services and wealth management services across Asia.