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Is Diversification Still the Way to Go?

I am not a financial adviser but I did have investments that I saw ‘going down the toilet’ and it concerned me greatly. As a person with very little investment experience, I felt the need to search for satisfactory answers.

I always find it interesting that when you diligently look for something, the answer invariably appears, and so it was with my search. I was led to a book written by Robert T. Kiyosaki called Rich Dad’s Prophecy. I had read Rich Dad Poor Dad a few times but that was the only Robert Kiyosaki book I had ever read. I immediately purchased a copy of the book and what I learned was one of the biggest eye openers I have ever experienced.

We are all aware of the cyclical nature of the stock market. We expect it to go up, down and sideways. However, in the long term we always expect to see a gradual incline. When we look at a graph we can see the little dips but for the most part, we see an upward motion.

A major part of the problem is that by the year 2016, the first of the 75 million baby boomers in the U.S. will be turning 70. Most of us are aware of the possible drain on the Government coffers but that’s not the whole story. A great percentage of these people have money in a 401k. They are going to be obligated to take our their money by the time they reach age 70.5 years of age. As most of these people have their pension money in a Defined Contribution Plan (a plan where the amount you receive is not cast in stone; the amount in the plan is always fluctuating based on the stock market) it will mean that they will have to sell all the mutual funds or bonds, or whatever they have in their portfolio, lock, stock and barrel.

I should just mention that people that are receiving pensions prior to the enactment of ERISA (Employee Retirement Income Security Act….which made 401ks possible) are receiving their pensions under a Defined Benefit Plan. It defines the dollar amount a person would receive upon retirement and that figure is a constant. Some lucky people even have a COLA (Cost of Living Allowance) built in and their pension can increase each year, if the cost of living goes up. These are the lucky ones. Most of us are now locked into a ‘contribution’ plan as opposed to a ‘benefit’ plan.

Just think about that for a moment! We are going to have millions of people selling off everything because they have to under the law. The Government has been patiently waiting for their tax dollars and this will be the time to collect. We all know that if there are more sellers than buyers, the market has to go down and it is going to drop fast and furious when this time comes.

Most people already know that they are in deep financial trouble but they don’t realize the full impact. They are still being told that as long as they diversify they will be fine. They are being told to sit tight and ride it out, because the markets always eventually go back up again. The financial scene of this world has changed drastically. Warren Buffet is quoted as saying “Diversification is a protection against ignorance. It makes very little sense for those that know what they are doing”.

So what is the answer? Financial education my friends. We have been lulled into thinking that we understand our investments and we have been living with a false sense of security. The Congressional Budget Office has stated that as of October 07, 2008 retirement plans have lost as much as $2 trillion over 15 months. Some of them have lost 20% of their value. This has many workers wondering how they are going to be able to retire. They thought they were going to be set for life when they retired, but now they wonder how they are going to be able to afford to retire at all. They are realizing that in actual fact, they knew next to nothing about being an investor.

It’s not too late to get a handle on your finances and make some intelligent decisions. Seek our the education you need to fully understand your financial position and that will enable you to make prudent decisions to ensure your future financial security.

Source by Jan Shimano

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