Non-Correlated Investments are Vital to Your Retirement Plan

Posted By: Chris Tanner ICOR Blog & News ,

The vast majority of U.S. retirement accounts are associated with a single investment type. Publicly traded securities. This is fantastic when the stock market is going up, but when the market is going down, the results can be gruesome.

Have you ever wondered how you can protect your hard-earned retirement savings when the market is down? First, let’s dis-spell a common myth. Wall street likes to sell the idea of “diversification”. The Wall Street definition of diversification goes something like this: buy a wide variety of stocks so if a single stock does poorly, you have a bunch of other stocks to balance out the bad one. This most often translates to people investing in mutual funds, ETFs, and target date funds. These products appeal to the masses because it allows them to own a huge variety of stock at a fraction of the cost it would take to buy them individually.

This type of diversification works when there are singular events like Enron. When Enron went bust, you could have lost your entire investment if it was your only holding. If Enron was a small portion of your overall investment portfolio, you did not feel the pain nearly as much as those who put everything into Enron. How does Wall Street diversification hold up when the ENTIRE market goes down? Not well. In 2008 the S&P 500 dropped 57%, and the vast majority of Americans saw their retirement plans drop in direct proportion to the market. The challenge with such large declines is that a 50% drop requires a 100% gain to get you back even. If you were 60 years old and planning to retire in 2008, Wall Street’s idea of diversification failed you.

Publicly traded securities are largely correlated to the stock market. That is to say they generally follow the markets ups and downs. So how do you protect yourself from market crashes and downturns? Think about non-correlated investments. What is a non-correlated investment? A non-correlated investment is one that is NOT tied to stock market results. Investments like gold, real estate, tax liens, and private loans are not directly correlated to the stock market and may hold up better during bear markets, or even help you survive major crashes. If you’d like to learn how you can move some of your retirement funds into non-correlated investments feel free to contact New Direction Trust and let us show you how.