If you have been investing for even a little while, you have probably heard that it's a good idea to diversify your holdings. By spreading your investment dollars among a range of securities, you can help defend yourself against downturns that may largely affect one type of asset.
For example, if you own only stocks, and the stock market is slumping, your portfolio may be vulnerable to sizable losses. But if you own stocks, bonds and other investments that are appropriate for your needs and risk tolerance, you may give yourself more opportunities for success. As you build resources for retirement, you should always diversify.
But what about after you retire?
Upon retiring, some Rim Country residents believe they should totally change the way they invest. They think that, because they are no longer working, they cannot afford to take any chances with their money, and so they pour most of it into conservative vehicles, such as certificates of deposit (CDs) and Treasury bills.
Of course, these types of investments do provide something you will need a lot of during your retirement years: Income. To supplement your Social Security and the distributions you receive from your 401(k) or other employer-sponsored retirement plan, you may need to generate a substantial amount of retirement income from your investment portfolio. Corporate bonds, Treasuries and CDs all provide regular income in the form of interest payments.
However, all fixed-income investments will be affected by one key factor: Interest rate movements. Specifically, if interest rates fall, and remain low for an extended time period, you may have trouble getting the income you need from new CDs and bonds that may be available.
And that's why you need to diversify your portfolio during your retirement years. If all your investments are going to be subject to interest-rate risk, you could potentially run into cash-flow problems at some point.
Consequently, you may want to add dividend-paying stocks to your holdings.
Interest rate movements can also affect stock prices, but the impact can be quite different from that experienced by fixed-income securities. Falling interest rates may be good news for some types of stocks. When companies find it cheaper to borrow to expand their operations, their profits and, by extension their stock price, may rise.
And if you are investing in stocks that pay -- and increase -- dividends, you'll have a source of rising income that can help keep you ahead of inflation during your retirement years. By contrast, when interest rates are low, your fixed-income investments may not keep pace with inflation -- which means you may lose purchasing power.
Keep in mind, though, that stocks are not fixed-income vehicles. Even if a company has increased dividends for 25 straight years -- as some have done -- it can choose to reduce, or not pay, its dividends at any time. And it's true that no stock can offer the protection of principal you will get from an investment-grade bond or a CD.
Still, most companies with long histories of paying dividends are well-run businesses that make a point of rewarding investors. So, as you seek to diversify your portfolio during your retirement years, and possibly boost your income stream, look for dividend-paying stocks. You could spend two or three decades in retirement. So, you'll want to invest wisely.
-- Scott Flake is a licensed investment representative with the firm of Edward Jones.
Call (928) 468-1470.