Portfolio Diversification

 

Diversification is all about lowering your risk. But, most of the time when people think about diversification they think about combing different types of investments in their portfolio; and hopefully you do it in such a way that you will offset risk. But, you can also diversify by not putting all of your eggs in one basket. That is, using different banks, using different bank accounts, so you make the most of that FDIC limit of $250,000. Some people even use different advisors, and what I say is, that’s fine, but don’t get too complicated. Because imagine if something happened to you, and your family members had to find all of these accounts. And you also may be putting a limit on any of the discounts you could receive with the smaller accounts you’re doing.

 

You can also diversify to lower your taxes. The problem that I see with many people I work with is that by the time they retire, most of their money is in tax-deferred accounts: 401(k)s, Traditional IRAs. So, what we’re looking at doing is considering a Roth IRA conversion, and what we do there—it’s not just for young people anymore—is we’re moving that tax-deferred money into an account that is tax free. So, now if you need to purchase a car or take a big trip, then you don’t have to worry about creating a big tax liability. And, those Roth IRAs have no required minimum distributions (RMDs) on them. So, you have more flexibility on those big purchases.

 

Well, how do you do it? Now there is no income limit for anyone, so anyone can do a Roth conversion. Work with your CPA, because you don’t want to bump yourself up into a higher income tax bracket. You can do something called partial conversions. And, if you leave it alone for five years, you’ll get the full benefit of tax free growth. It’s wonderful. But, also know that if you have to, you can dip into the original amount you put in. So, that’s another way to diversify—along tax lines.

 

In terms of starting out, the first place to start is your 401(k). Then, if you have some extra money, you want to have a good savings account. You can also make use of a Roth IRA beyond your 401(k) depending on your income limits.

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