When it comes to structuring your investment portfolio, there’s no single ideal model portfolio. Your best asset allocation will depend, in part, on your investment goals and how much time you have to build wealth. Here’s how to create a solid retirement portfolio in five steps.
Shed risky stocks
One recipe for endangering your financial future is having an investment portfolio full of risky stocks. Even if you only hold a few risky stocks, you might want to sell them. Volatility is easier to handle when you’re a long way from retirement: Should one or more such holdings plunge, you’ll have time to wait for rebounding prices, and if a holding simply goes down in flames, you’ll still be working and able to keep adding money to your investment portfolio.
There are plenty of stocks that are too risky for us at any time. These include stocks where you don’t really understand how the company makes its money, where you don’t see sustainable competitive advantages, or where the stock is simply overvalued.
Hold dividend stocks
So what kinds of stocks should you hold? Well, income-producing ones will be particularly welcome in retirement. Dividend payers are among your best options, but it’s important to be selective. Look for healthy and growing companies (i.e. ones with little or no debt), competitive advantages (such as a strong brand and barriers to entry for would-be competitors, and plenty of room to grow), and focus on the dividend growth rate as much as the dividend.
A 2% dividend might be preferable to a 3% or even 4% one if it’s being increased at a much faster clip. In a few years, it could be paying you more than the now-higher dividend. Look for relatively low payout ratios, too, such as those around 75% or lower. The payout ratio shows you what percentage of earnings are being paid out in dividends, and a high number leaves the company with little wiggle room and a greater chance of having to reduce its payout one day.
Preferred stocks, which tend to offer greater-than-average dividends and lower-than-average price appreciation, can also be good for retirees as they can generate significant income. You might build your retirement portfolio with one or more preferred-stock funds for diversification across a number of issues. The PowerShares Preferred Portfolio (PGX) exchange-traded fund (ETF), for example, recently yielded about 5.5%.