Financial advisors may disagree on many things, but most agree that a retirement investment portfolio should try to maximize return with minimum risk. That diversity of holdings is the best way to protect yourself against the meltdown of any one sector.

TUTORIAL: Greatest Investors

Another area of general agreement among financial advisors, although there's some dissenters in this area as well, is on the composition of the ideal investment portfolio for retirees. Principle objectives of a retiree's equities portfolio should be:

Investments across a broad range of instruments and asset classes - mainly stocks, bonds and index funds, plus cash or cash equivalents - provides the diversity that protects a portfolio against unexpected market declines. Also, allocating investments across sectors can help protect against certain shocks. A price decline in one market sector is then counter-balanced by other unaffected holdings in the remainder of the portfolio. When investing in equity, many financial advisors recommend that no one stock should be weighted with more than 4% of total portfolio allocation. Index funds, such as one that tracks the S&P 500, invest in Fortune 500 stocks and are also recommended by many financial advisors. They have a low expense rate and have a historic record of growth. Triple-A corporate and government bonds are also recommended for the fixed income portion of a portfolio. (For more on differing opinions, see Why Financial Advisers Disagree.)

Capital Preservation
The nest egg of equities and other investments held by the retiree represents a lifetime of working, investing and saving. The capital value of, and return on, those investments must sustain the retiree with income for the rest of his or her life. So, a principal strategy of whoever manages the portfolio should be the preservation of the capital that the portfolio contains. To achieve that result, the portfolio should hold stocks with little or no volatility. Stocks and other investments vulnerable to downward price pressure, sector weaknesses and big price swings are not suitable holdings for retirees.

Steady, Reliable Dividends
High quality, large-cap, dividend-paying stocks in industries such as health care, energy, pharmaceuticals, leading fast food chains and technology have been recommended by many advisors. A basket made up of well-chosen equities will provide the most dependable returns. A diversified portfolio of dividend-producing stocks in several strong sectors should provide a steady income stream for the retiree.

The stocks themselves and news pertaining to these stocks and their market sectors should be continually monitored. When negative influences occur, it may be time to sell the weakened stock and replace it with a stronger stock. A financial advisor or broker can do both the monitoring of price changes and business news and advise the appropriate portfolio adjustment.

However, because there's no incentive to trade stock for the retiree - no trading commission is paid to the retired person – the retiree should also do the monitoring and market research. This is not always possible, and often the retiree is not sufficiently knowledgeable, so it's critical to have a trusted, experienced financial advisor. (Read how investors find stocks that fit this strategy in Finding Solid Buy-And-Hold Stocks.)

Risk Avoidance
This objective - avoiding risky investments - is related to the above two portfolio objectives. Highly volatile stocks that regularly fluctuate up and down in price 2% or more in a day are not desirable holdings for a retiree's portfolio. Growth stocks that continually trend upward despite occasional price drops due to profit-taking selloffs might feel like a more appropriate choice, but each stock needs to be evaluated against the other investments in the portfolio and the weight. Some financial advisors recommend that a small percentage of a portfolio (usually no more than 4%) contain equities that may provide a bigger return on investment. These stocks, of course, are riskier. If and when there's a move in these stocks to the upside, the retiree reaps the reward of this risk. It could contribute to maintaining buying power of the entire portfolio, or help keep up with inflation.

The Bottom Line
Once retired, it's a good idea to have a diverse portfolio. Preserving capital and avoiding risk are essential components that will allow a retiree to enjoy retirement with peace of mind. It's a good idea to maintain the services of a trusted and knowledgeable financial advisor once you retire, that way he or she can do the market research for you while you think about your retirement. (Your investments should change with your goals and income, check out The Successful Investment Journey.)

Related Articles
  1. Mutual Funds & ETFs

    VBK: Vanguard Small-Cap Growth ETF

    Take a close look at the Vanguard Small-Cap Growth ETF, which focuses on domestic small-cap equities with a fundamental growth strategy.
  2. Investing Basics

    5 Common Mistakes Young Investors Make

    Missteps are common whenever you’re learning something new. But in investing, missteps can have serious financial consequences.
  3. Mutual Funds & ETFs

    The 4 Best American Funds for Growth Investors in 2016

    Discover four excellent growth funds from American Funds, one of the country's premier mutual fund families with a history of consistent returns.
  4. Retirement

    Is Retiring in France Safe Today?

    After a series of deadly terrorist incidents, some may be asking themselves this question.
  5. Investing Basics

    The Top 4 Income Investments for Retirees in 2016

    These four investment types should mitigate risk in 2016 for retirees seeking income.
  6. Products and Investments

    A Guide to DIY Portfolio Management

    These are some of the pillars needed to build a DIY portfolio.
  7. Mutual Funds & ETFs

    The 5 Best T. Rowe Price Funds for the Income Seeker in 2016 (TROW)

    Find out which T. Rowe Price mutual funds to use to create a diversified income portfolio for current income, income growth and capital preservation.
  8. Personal Wealth & Private Banking

    What People Hate About Financial Advisors

    Advisors need to make a living too, but doing so by cutting corners at a client's expense isn't right. Here are the top complaints against advisors.
  9. Mutual Funds & ETFs

    Top 3 Thornburg Funds for Retirement Diversification in 2016

    Learn about the Thornburg family of mutual funds and the top three funds that you should consider for retirement diversification in 2016.
  10. Investing

    What Investors Need to Know About Returns in 2016

    Last year wasn’t a great one for investors seeking solid returns, so here are three things we believe all investors need to know about returns in 2016.
  1. Am I losing the right to collect spousal Social Security benefits before I collect ...

    The short answer is yes, if you haven't reached age 62 by December 31, 2015. The Bipartisan Budget Act of 2015 disrupted ... Read Full Answer >>
  2. What is the maximum I can receive from my Social Security retirement benefit?

    The maximum monthly Social Security benefit payment for a person retiring in 2016 at full retirement age is $2,639. However, ... Read Full Answer >>
  3. Are target-date retirement funds good investments?

    The main benefit of target-date retirement funds is convenience. If you really don't want to bother with your retirement ... Read Full Answer >>
  4. What's the difference between Social Security Disability Insurance (SSDI) and Supplemental ...

    Disabled persons can receive payments through two programs: Social Security Disability Insurance and Supplemental Security ... Read Full Answer >>
  5. Where else can I save for retirement after I max out my Roth IRA?

    With uncertainty about the sustainability of Social Security benefits for future retirees, a lot of responsibility for saving ... Read Full Answer >>
  6. Will quitting your job hurt your 401(k)?

    Quitting a job doesn't have to impact a 401(k) balance negatively. In fact, it may actually help in the long run. When leaving ... Read Full Answer >>
Trading Center