BUIldING YOUR RETIREmENT PlAN FROm ThE FOUNdATION UPstable and paid good dividends, and that we were diversified so
that if any one particular stock had a problem it wouldn’t have
too much of an impact. That’s why I don’t understand how this
could have happened?”
So, can you think of a few areas where she and her advisor
weren’t speaking the same language? The first thing is that they
obviously have very different definitions of what “safe” means.
The second is that there are many types of diversification. The
type that she had will help against what is called business risk.
Business risk is the risk of any one company having a problem
and it causing their stock to take a hit. Unfortunately this type
of diversification doesn’t do anything to solve for what is called
systemic risk, or “risk in the system.” An example of systemic
risk is the market crashes of 2001-2002 or the crash of 2008.
It didn’t matter what types of stocks you owned, if you owned
stocks, you got clobbered! So we want to diversify in a way that
protects us from both.D. How can we strategize to protect investments while still gen-
erating income and protecting against inflation all at the same
time?
In retirement, we need our savings to generate a paycheck since
we are no longer earning an income. There is a shift from a
growth strategy to a distribution strategy. I’m often asked “what
are some good investments these days?” that’s like going to the
doctor and asking, “what are some good medicines I could be
taking?” Investments are a lot like medicines in that they are
designed to do different things.
So the types of investments that can generate a stable, predict-
able income may not be (and probably aren’t) the best way to
get maximum long-term gains. By the same token, if we are
expecting our growth investments to generate an annual in-
come, we had better have a constitution made of iron. That type
of approach may appeal to mountain climbers, racecar drivers
and cage fighters, but the people that become my clients are
looking for stability. In order to accomplish that, we have to be
very careful and deliberate about how we structure your income
plan. It doesn’t mean we don’t want some growth investments
in the portfolio, it just means we don’t want to count on them