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If you have been investing for even a
little while, you have heard that it is
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? Some
people believe they should totally
change the way they invest after they
retire. 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.
That is 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
stock price - may rise.
If you are investing in
stocks that pay and increase dividends,
you will 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 could 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 is 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: you
want to invest wisely. |
