Investing in Retirement: Don’t Over-Concentrate on It


Usually, it’s great to concentrate. But believe it or not, the opposite is true when it comes to investing in retirement. Now, we’re not suggesting you should be careless with your retirement reserves. What we’re talking about is the risks you incur if you concentrate too much of your money in any one security, sector, or venture. 

Avoiding concentrated investments is always a good idea. But it becomes especially important once you retire. This is because you have far fewer opportunities to make up for lost reserves if an overly concentrated position goes bust. 

Concentrated investments come in many forms. Here are three of the most common kinds.

1. Company Stocks or Preferred Shares: Whether you’re invested in your former employer’s stock, or a seemingly invincible global enterprise, no single stock should be more than 5% of your total investment portfolio. (Even that much may be pushing it.)

Sometime we speak with investors who are reluctant to eliminate a concentrated holding. If the stock has done well for you, it’s tempting to assume it always will. Besides, paying taxes on the gains is never fun. However, we would argue that the pain of paying a tax bill pales in comparison to finding yourself overly invested in the next Nortel. Bottom line: Never assume a company is too big or too safe to fail. 

2. Real Estate and Real Estate Debt: Real estate investments in the form of investment properties, homeowner loans, and second mortgages represent another kind of holding that can come back to haunt you in retirement. This sector has a history of periodically falling hard and fast. When it does, it can take your financial well-being down with it. Typically, we advise our clients to pay off their home loans before they retire. It leaves one less thing to ever have to worry about once your earning days are past. 

3. Personal loans: If you’ve borrowed money from, or loaned money to others, we also recommend paying off or collecting the money owed. This is especially important if the loan is large enough to make or break your successful retirement if it goes into default.

In short, once you’re retired, the money you have is the money you have, so it’s essential to eliminate any unnecessary financial risks. And there are few risks more dangerous and less necessary than concentrating too much of your worldly wealth in any one place.

Fortunately, there also are few risks that are easier to remedy. The antidote to a risky concentrated position is diversification. These days, it’s easy to use low-cost, efficiently managed index or index-like funds to diversify your investments far and wide across global stock and bond markets.

Would you like to know more about eliminating overly concentrated positions in your retirement portfolio? Tune into our “Think Smart” podcast on managing concentrated positions. And let us know if we can assist.

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