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The Importance of a Well-Diversified Investment Portfolio

Posted by: David Riggs on Wednesday, September 5, 2012 at 12:00:00 am

Itís only early September but the somewhat below normal temperatures makes it feel like autumn even though the official start is still a few weeks away. That cool crispness of the early morning brings back memories of heading off to school for another year. As I sit here thinking about the young men and women returning to a Ball State that is much different since my last class there I recall other changes.

In the mid-1980s well before most of todayís college students were born, I was a young stock broker working in a world most of them would find horrifying- no iPods, no cell phones, no texting(!), and almost no personal computers. We did have a computer or two around the office mostly for the accounting department. They werenít an essential tool for me as they are today.

Somewhere back in that time a certain trend in the investment markets began. As the 80ís boom got rolling and the economy grew, interest rates started falling. While there have been ups and downs along the way the overall trend has been down for decades.

I laugh a little now recalling a conversation with the head of the firm I worked for back then and agreeing with him that an 8% long-term municipal bond rate was what seemed to be acceptable to most of our clients who wanted tax-free income. Anyone looking for even half that rate of interest today is going to be very disappointed.

Declining interest rates are a problem for people who depend on their savings to generate income for them as many of our clients do. The situation has never been worse than the last few years as our government has tried to revive the economy with policies that push rates down even more. The benchmark 10-year Treasury note recently hit an all-time low under 1.5% and thatís reflected in all interest bearing investments.

People who invested in 5-year bank certificates of deposit as recently as 2007 received 5% interest but now face a 70% reduction in income as those CDs mature. The rates being offered do not even make up for the reduction in the buying power of the dollar caused by inflation.

Another trend that represents a possible solution to this problem is the tendency of stock dividends to rise over time. The dividends paid by the stocks in the S&P 500 stock market index have more than tripled since 1988 and have increased or stayed the same in all but 19 out of the 98 quarters since then.

But isnít there more risk to principal in stocks? Yes there is or at least there has been greater volatility. The S&P 500 has grown in value more than fivefold in the last 25 years but there have been and will be periods of decline. The last significant one was in 2008 and the index has recovered about 80% of that decline so far. Dividend income also fell in 2008 but surpassed its old high two years ago.

Of course not every stock in the S&P 500 is a dividend payer and not every one is an attractive investment. MutualWealth Management Group can select stocks appropriate for your needs and design a well-diversified, managed portfolio that may minimize volatility risk and maximize your income and growth potential. A total portfolio may also include some bonds which may further dampen volatility.

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