The mix matters: why and how to diversify your portfolio

March 25, 2020


Longer lifespans can make Americans question traditional investment rules. Increasing longevity brings with it more nuanced considerations that may encourage investigation of non-correlated assets.

the-mix-matters-why-and-how-to-diversify-your-portfolio

Some investment rules have stood the test of time:

  • Buy low, sell high!
  • Diversify! Diversify! Diversify!
  • Abide by the 60-40 rule: 60% stocks, 40% bonds.

While there can be value in the test of time, the retirement realities faced by Americans have changed. Lifespans are longer, a 30-year retirement isn’t unusual, and traditional sources of retirement income—mainly Social Security and pensions—don’t provide the same sense of security they may have in the past.


Longevity = Complexity

Increased longevity brings a new set of complications to retirement planning. Longer lifespans mean investors may need to challenge conventional investment rules in the face of more nuanced considerations:


Social Security—Timing Matters. 

To receive your full retirement benefits, you need to wait until your full retirement age (FRA). Your year of birth determines your FRA. Those who turned 62 in 2017 or beyond will have an FRA that ranges from age 66 to age 67. If you claim benefits before your FRA, you will receive a reduced benefit, and if you claim benefits after reaching your FRA, you will receive an increased benefit.


Healthcare.

Not only does increased longevity mean more years of healthcare to afford, but many Americans are starting their retirement before they’re eligible for Medicare, and healthcare inflation continues to outpace the rate of general inflation.1 The average couple is expected to need $285,000 in today’s dollars for medical expenses in retirement, excluding long-term care.2


Supporting Others.

The newest generation of retirees are still finding themselves needing to care for others in their lives, including parents and children. Longer lifespans can mean those who are just starting retirement may be caretakers for their retired parents who need assistance. In addition, a recent study found that 79% of parents continue to serve as the “family bank” for their adult children, paying not only for big-ticket items such as college and weddings, but also for smaller expenses such as phone bills, groceries, and rent.3 Parents of adult children contribute $500 billion annually—twice the amount they invest in their own retirement accounts.4 Sixty-three percent of parents in the study said they have sacrificed their financial security for the sake of their children.5

"With such diversified needs, Americans could use this simple rule: One investment does not fit all." 


One Product Does Not Fit All

With such diversified needs, Americans could use this simple rule: One investment does not fit all.

Investors who have been steered only toward stocks may be taking a risk by limiting themselves to options that are market-dependent. A portfolio entirely invested in the stocks that comprise the S&P 500 locks wealth into investments that are highly correlated—meaning that when the market dips, it's likely they will all dip. 

This can put investors in a risky place in a down market—if they hit a rough patch, there’s nowhere to hide. Those already retired and making withdrawals may be forced to sell stocks in a down market. These losses can be harder to recover from in retirement without employment income to reinvest or another cushion to lean on to wait for a stock market recovery.


What Does Diversification Look Like?

To help offset these dips, you may want to consider having non-correlated assets.

If your portfolio currently comprises only large-cap stocks, adding small-cap stocks won’t do much to diversify it, as both are still correlated. Generally, when people think of diversifying their portfolio, they think of adding international stocks, and they overlook fixed-income investments.

Annuities*, for example, can diversify your portfolio and add stability by providing steady, reliable income for retirement that doesn’t depend on the markets. In addition, annuites can provide income for the rest of your life.


 

 

 

*What is an annuity?

Annuities are long-term, tax-deferred vehicles designed for retirement. Earnings are taxable as ordinary income when distributed. Individuals may be subject to a 10% additional tax for withdrawals before age 59½ unless an exception to the tax is met.

Optional benefits are available for an extra charge in addition to the ongoing fees and expenses of the variable annuity. 

Guarantees are backed by the claims paying ability of the issuing insurance company. 

 

1. “Healthcare Price Growth Significantly Outpaces Inflation,” Modern Healthcare, October 2018

2. “How Much Healthcare Will Cost You in Retirement,” Barron’s, April 2019

3.“The Financial Journey of Modern Parenting: Joy, Complexity and Sacrifice,” Merrill Lynch, October 2018

4. Ibid.

5. Ibid.

 

Annuities are issued by Jackson National Life Insurance Company (Home Office: Lansing, Michigan) and in New York, annuities are issued by Jackson National Life Insurance Company of New York (Home Office: Purchase, New York). Variable products are distributed by Jackson National Life Distributors LLC, member FINRA. May not be available in all states and state variations may apply. These products have limitations and restrictions. Contact the Company for more information.

Jackson® is the marketing name for Jackson National Life Insurance Company® and Jackson National Life Insurance Company of New York®. Jackson National Life Distributors LLC.

The opinions and forecasts expressed are those of the author and individuals quoted and should not be construed as a recommendation or as complete.

Tom Hurley and Phil Wright are affiliated with Jackson. All other authors are not affiliated with Jackson.