The Benefits of Diversification in Your Retirement Plan
Key Takeaways:
Diversification is a key investing principle, especially as you approach retirement, to help manage risk, provide long-term stability, and leverage market cycles.
Investors can diversify their retirement portfolios with the help of a financial advisor through strategic asset allocation based on their risk tolerance, goals, and time horizons. This can be achieved by investing in global markets and using funds with built-in diversification, among other options.
Diversification and ongoing portfolio management can help investors avoid common mistakes, such as overconcentration or reliance on a single investment type and missing out on global market opportunities.
As you save for retirement, preservation, along with growth, are priorities to help secure the funds that will sustain you in your golden years. With market swings, inflation, and other external factors affecting your portfolio, managing risk is a key focus of ongoing investment management. Diversification is a primary tool investors use to manage and reduce risk. In this blogpost, we’ll share the top benefits of diversification in your retirement plan.
What is Retirement Plan Diversification?
Diversification means spreading out your investments across different asset classes, industries, and geographies to help prevent reliance on a single type of investment. This type of reliance or overconcentration could be detrimental to your portfolio if that investment type performs poorly. For example, a well-balanced portfolio may include both domestic and global investments, as well as high- and low-risk stocks, allocated according to your risk tolerance and time horizon.
Overall, diversification can make you and your portfolio more resilient, helping to smooth out losses due to volatility.
What are the Benefits of a Diversified Retirement Portfolio?
Building a diversified retirement portfolio offers retirees many benefits, including:
Risk Management: With a balanced portfolio, a single poor-performing investment will not derail your entire portfolio; instead, it will in theory be offset by positive yields from other investments.
Growth Opportunities: Investing often involves market cycles, during which asset classes rotate to lead in performance. Through diversification, investors don’t have to guess or chase trends; instead, they can take a balanced approach by leveraging market cycles.
Steady Retirement Income: Ensuring you can make sustained income withdrawals is essential in retirement, so diversification can help manage significant losses that could affect your future income.
Global Opportunities: Investing in global markets can provide exposure to companies and innovations not available domestically.
Tax-Efficiency: Retirement investment accounts that have different tax treatments can give you options and flexibility when managing your tax liability and withdrawals in the future.
How to Build a Diversified Retirement Portfolio
When building your retirement portfolio to emphasize diversification, these are the key areas to prioritize with the help of your investment or financial advisor:
Strategic Asset Allocation: A professional can help you explore a balanced mix of different types of asset classes, such as stocks and bonds, and drill down further into diversified asset classes that align with your goals, timeline, and income needs, including small- and large-cap stocks. For example, as you get closer to retirement, you may reduce your risk across certain investments to help protect your funds.
Global Market Diversification: Geographical diversification, such as investing in global markets, involves securing assets and opportunities that may be available outside the U.S. This type of diversification is not reliant on a single country’s market but again leverages the different market cycles of different countries’ economies.
Using Investment Funds for Diversification: If you don’t want to pick individual stocks and bonds, a mutual fund or exchange-traded fund (ETF) provides built-in diversification, giving investors access to various diversified assets in a single fund, simplifying the process of investing.
Common Retirement Plan Mistakes to Avoid
There are various actions you can take to help ensure you design a diversified and balanced portfolio. Diversification, along with ongoing monitoring and the help of a trusted advisor, can also help you avoid some common mistakes we see in retirement plans, such as:
Overconcentration in a Single Investment Type: You may have heard about not putting all your eggs in one basket, which refers to a lack of diversification, i.e, a portfolio that’s highly dependent on the financial health and outcomes of a single asset class, sector, or geographic area. As we’ve mentioned, relying heavily on a single type of investment creates an overconcentration that could be detrimental to your portfolio if that investment performs poorly. We encourage you to work with a financial professional to create a balanced mix of stocks, bonds, and real estate investments across various industries, which can help offset any potential losses.
Overlooking Global Opportunities: There are several reasons investors may overlook opportunities outside of domestic markets, including a lack of familiarity, which can feel risky; limited access to global options; or the belief that U.S. markets will consistently outperform other markets. However, what we’ve observed is that market cycles rotate investment winners, and global investments can offer various opportunities that may not be available in the United States. Adding global diversification can help provide more growth potential and mitigate volatility across your portfolio.
Skipping Routine Portfolio Rebalancing: When creating your portfolio, you assign various weights or targets to each asset class based on your goals and risk tolerance, a process referred to as asset allocation. At times, when certain stocks outperform others, it can cause your targets to shift from your original plan. Rebalancing is the process of readjusting your investments to return them to their original targets. If you don’t periodically rebalance your assets, they can easily get off target or create overconcentration and risks in your portfolio. Typically an annual process, a professional can help determine how often rebalancing makes sense for you.
Only Investing in Recent Winners: In investing, you often hear that past performance does not dictate future performance. The saying cautions against investing only in investments that have had recent or rapid success. As we’ve mentioned, market cycles are inherent to investing, and it’s difficult to time the market for success. Rather than chasing trends or falling into momentum, investing in a diversified portfolio can offer long-term growth potential while managing risks.
Overlooking the Impact of Taxes on Investments: There are various tax implications associated with investing that every investor should be aware of, ranging from selling a stock to taking income withdrawals in retirement. We recommend consulting with your financial advisor and tax professional to understand the tax implications of your retirement savings accounts, as they may have different tax treatments, such as taxable, tax-advantaged, and tax-deferred. Your potential tax liability may influence the types of accounts in which you invest and the timing of your retirement income withdrawals, for example, to avoid falling into a higher tax bracket. Significant appreciation can also trigger capital gains taxes, which could be offset by tax-loss harvesting, charitable giving, or other strategies. Your team of professionals can walk you through your options to best manage the taxes on your investments.
Not Considering How Assets Move Together: Another aspect of diversification investors may not consider is correlation, or how assets move in relation to one another, often referred to as positive, negative, or low or no correlation. For example, if two assets have a positive correlation like two comparable tech stocks, they likely move together, up or down with the market; low or no, they have little dependency on each other and may or may not move together; and a negative correlation means they typically move in opposite directions, i.e., when one rises, the other falls. Correlation is essential to consider, as investing in low- or negatively correlated assets can help smooth out or stabilize returns during fluctuations.
Ready to Build a Strong Retirement Portfolio?
Diversification is a time-tested investing principle offering various benefits, especially as you approach retirement. At Marine Street Financial, we take a tax-focused approach to financial planning and investing, ensuring we always consider diversification, risk, and opportunities. We often guide our clients through their 401(k) distributions, retirement income strategies, exploring an IRA for supplemental savings, and building a comprehensive retirement plan that prioritizes their goals. If you’d like to learn more about how we can help you map out a financial course to reach your retirement goals, please visit us online to share more about your situation or contact us at 858-754-3501.
This material was prepared for Marine Street Financial use.
Source: LPL Financial, June 16, 2025
Source: LPL Financial, June 30, 2025
Diversification and asset allocation do not assure profit or protect against loss in declining markets. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.