If the market crashed would you be wiped out?

Many people would be wiped out if the stock market were to crash today. Not me. I'll tell you why in a minute.......

Here's another question: Is your retirement portfolio diversified?

Most people would say YES. And I'm gonna say that they really are not. Why? Read on.......

The American Heritage Dictionary defines the word "DIVERSIFY" as follows:

1.a. To give variety to; vary.
1.b. To extend (business activities) into disparate fields.
2. To distribute (investments) among several companies in order to average the risk of loss. To spread out activities or investments, especially in business.

"Approximately 96% of U.S. retirement portfolios are limited to 'traditional' market investments. As a result, retirement portfolios are very vulnerable to market risk, which, if dramatic, can wipe out an individual's lifetime savings." (Source: PENSCO Trust Company, April 25, 2008).

What the heck does all this mean?

It means that "many people think that their portfolios are diversified but they really don't have a clue".

Now this may sound harsh at first blush, but if you can grasp the concept below, it can be life changing and protect you from financial disaster. And, it's the reason I said at the start that I wouldn't be wiped out if the stock market crashed today.

"TRUE DIVERSIFICATION"

"True Diversification is a means to increase your expected rate of return and at the same time, reduce your portfolio volatility and risk."

Does this sound improbable or impossible? Allow me to introduce you to:

'Modern Portfolio Theory' (MPT)

Modern Portfolio Theory is a sophisticated, yet simple to execute, investment approach first developed by Professor Harry Markowitz of the University of Chicago in 1952. In 1990, he received a Nobel Prize in Economics for MPT, which has become the framework upon which many institutions such as Harvard and Yale universities' endowment funds and savvy investors construct their investment portfolios.

It was Markowitz's position that portfolio risk could be reduced and the expected rate of return increased, when assets of dissimilar price movements were combined. "A diversified portfolio, of uncorrelated asset classes (or 'Alternative Assets'), can provide the highest returns with the least amount of volatility or risk."

"Many investors are under the delusion that their portfolios are adequately diversified if they are invested in various individual stocks, mutual funds, bonds, and international stocks." While these are different investments, they are still in the same general asset class, with similar price movements and generally move in concert with each other. For proof, take a look at what happened in the last market crashes. "TRUE diversification’ according to MPT, is in ‘uncorrelated and Alternative Asset Classes’ that move independently from one another."

So, now I'm going to repeat myself:

Approximately 96% of U.S. retirement portfolios are limited to 'traditional' market investments, and although the inclusion of 'Alternative Assets' is increasing, it has a long way to go. And as a result, retirement portfolios are very vulnerable to market risk, which, if dramatic, can wipe out an individual's lifetime savings. More consideration therefore, needs to be given to 'True Diversification' and incorporating Alternative Assets and non-correlated asset classes into retirement portfolios to hedge against market risk.

Are you "Truly Diversified"? Here are some Alternative Assets/non-correlated asset classes that you might consider including in your own retirement portfolio to provide that 'hedge' against market risk:

Alternative Asset Examples

• Land development projects (my personal favorite)
• Raw land
• Commercial & residential real estate
• Tenancy in common investments (TIC's)
• Real estate investment trusts (REIT's)
• Trust deeds
• Tax liens & tax lien certificates
• Precious metals (gold, silver, platinum)
• Gemstones
• Commodities/futures
• Oil & gas
• Hedge funds
• Private equity
• etc.

I believe the pick of the litter is Land Development because it has outstanding returns and is secured by the land itself. For more information, click on the image link below:

Hopefully, you'll take this information to heart and do something with it. I did and I sleep a lot better at night. Now, you may be saying "but I can't do anything, my retirement money is tied up in my IRA or 401K". Well, guess again. You absolutely can use those funds to invest in Alternative Assets. Check out my Blog dated March 4, 2008, titled "How to take control of your IRA & 401K investments". It will explain the easy steps to do this & there's a FREE information guide you can download there to explain everything.


To your retirement portfolio health! Until next time!

- Retirement Wiz. (email me anytime at:johnha7@yahoo.com)