What are Required Minimum Distributions?
Whether you’re already retired, approaching retirement, or still saving for retirement you may have heard of that your accounts may be subject to required minimum distributions (RMDs).
RMDs are not discussed often, but they affect anyone who is saving for retirement in a qualified account. A couple of examples of qualified accounts include a 401(k) plan and a traditional IRA. When you contribute to a 401(k) plan, you are doing so on a pre-tax basis. This means that you are not paying income taxes on those contributions now, but the catch is that you will need to pay income taxes when you withdraw money from the 401(k) plan.
There is another catch. At some point, you must make withdrawals from the account. The minimum amount that you are required to distribute is based on the account balance at the end of the previous year and your age at the end of the current year - it’s slightly confusing, but there are plenty of calculators available online to calculate your RMD. The age when you must start taking RMDs depends on your birth year, but it varies between ages 70 1/2 and 75 under current legislation.
People are often unpleasantly surprised to discover they must make withdrawals from their qualified accounts, especially if they don’t need the funds. But, this does not make qualified accounts “bad” at all. Deferring taxes until retirement can be very advantages since any interest, dividends, and gains that occur in the account are not taxed - only the withdrawal itself is considered taxable income. It is incredibly important to satisfy the RMD each year since the penalty can be as high as 25% of the amount you missed.
This blog post is focused solely on qualified accounts that the original owner contributes to and it does not even mention qualified accounts that were inherited. Inherited qualified accounts will have RMDs and the rules are a little more complicated. An effective strategy is to understand how your assets are allocated from a tax-perspective (pre-tax, Roth, taxable) and develop a withdrawal plan that works for your personal situation.
The opinions expressed in any commentary posted on this site are solely those of the individual author and do not necessarily reflect the views or opinions of Redspire Wealth Management, LLC. These opinions are based on information available at the time of posting and are subject to change without notice. Redspire Wealth Management, LLC does not commit to updating any posted positions or commentary to reflect subsequent developments. While the information and reasoning used to form these opinions are believed to be from reliable sources, Redspire Wealth Management, LLC does not verify this information, and no guarantee is provided regarding its accuracy, completeness, or validity. Redspire Wealth Management, LLC disclaims any and all liability for actions taken or not taken based on the content of this site. No warranty, express or implied, is given in connection with the content provided.
Why Should I Diversify My Portfolio?
In the previous blog post “Should I Time the Market?” there is a table that shows the annual investment returns for different asset classes. The point of that blog was to demonstrate that timing the market is difficult to do and can diminish investment returns because of the opportunity cost of waiting for the “perfect” time to invest. If you read the table closely and try to follow a single asset class for each year, then you’ll notice that in some years it performs well (relative to other investments) and performs poorly without any discernible pattern.
This is one of the strongest reasons for diversification - because nobody knows what future returns will be for any asset class.
We are familiar with the saying, “Don’t put all your eggs in one basket,” and it is applicable to investing. When we recommend diversifying an investment portfolio, we typically mean two things. First, it means investing in different asset classes. Second, it means investing in different assets within those asset classes.
Investing in Different Asset Classes
You may find content online, usually on forums or social media, giving advice for how to invest your portfolio. If that content is targeted toward new investors, it is common that the information says to keep things simple and just invest in an S&P 500 index fund. This index fund consists of approximately 500 of the largest companies in the United States.
Historically, the S&P 500 has had relatively good investment returns compared to other asset classes. But, what does the future hold for the S&P 500? What if these companies perform poorly for any variety of reasons - lack of innovation, political instability, war, inflation? There are many different potential causes for poor performance that can’t be predicted. Putting all “eggs” in the S&P 500 “basket” may expose investors to risks unique to those companies in the United States. This type of risk is a key term called unsystematic risk. Thankfully, unsystematic risk is well-researched and it is possible to reduce it.
Investors do not need to limit themselves to only large companies in the United States. There is a very long list of asset classes that can reduce the unsystematic risk of a portfolio, but the essence of the solution is diversification. Investing in other asset classes whose returns are not correlated with the S&P 500 index (or whatever the index is) can reduce unsystematic risk. Common asset classes are small-cap stocks, foreign stocks, treasury bonds, corporate bonds, real estate, and commodities, but this is not an exhaustive list.
The focus so far has been to hedge against the downside risk of investing in just one asset class so you may ask, “But, what if the S&P 500 index continues to perform better than other asset classes in the future?” Keep in mind that diversification means lowering unsystematic risk by adding other asset classes, not forsaking one asset class entirely for another. Keeping a diverse mix of assets is a wise way to build a portfolio for the long-term.
Investing in Different Assets Within Asset Classes
New investors may be tempted to ignore advice concerning diversification and choose to buy individual assets. One misconception investors hold is that they have meaningful diversification in a certain asset class (like large-cap domestic stocks) because they invest in well-known companies that fit that category (like Google, Apple, Costco, or NVIDIA). Although these companies may seem stable, the reality is that individual stocks can be very volatile.
Back in January 2025, NVIDIA was a darling company because of its dominance in graphics cards and AI technology. It was a profitable company with strong leadership and a bright future with the advent of AI’s proliferation. However, a report came out at the end of January 2025 that a Chinese company created and trained its own AI model with a fraction of the processing power needed from the types of cards that NVIDIA sells. Investors saw this as a risk to NVIDIA’s business and the stock lost almost 17% in a single trading day. This is equivalent to more than $500 billion in market capitalization and the largest single-day loss for NVIDIA. That same day Wal-Mart had a modest gain in its stock price, unrelated to the news about NVIDIA.
These types of developments - positive and negative - are happening to individual companies all the time and the news will cause swings in the stock prices. These swings can be dramatic when investors hold only a very small set of companies. The previous example isn’t to suggest that investors should have owned Wal-Mart instead of NVIDIA. A portfolio invested in many companies of various sizes and industries can help to “smooth” out this volatility because their businesses are generally unrelated. Like the previous example, when one company’s stock is down another one’s may be up for completely unrelated reasons. Add in more companies and the consequence is to increase the overall diversification of the portfolio. In the US stock market, there are more than 4,000 publicly-traded companies!
What Can You Do?
Determining the appropriate investment allocation is going to depend entirely on an investor’s goals, aspirations, risk tolerance, time horizon, and ability to take investment risks. There is not a one-size-fits all solution for an investment allocation because everyone’s circumstances are different. Reflecting on one’s risk tolerance and time horizon can help come up with a general investment strategy. Consider asking yourself these questions as you review your investment allocation.
How would I feel if my portfolio lost value?
Do I have time to wait for my investments to recover?
Would I sell my investments if they lost value in a short amount of time?
For what goal/purpose am I investing these funds (college, down payment, retirement, etc.)?
Would I be more comfortable with a less volatile investment strategy?
How have I reacted in the past to market volatility? Did I sell or hold?
These questions are a starting point as you develop your overall strategy.
The opinions expressed in any commentary posted on this site are solely those of the individual author and do not necessarily reflect the views or opinions of Redspire Wealth Management, LLC. These opinions are based on information available at the time of posting and are subject to change without notice. Redspire Wealth Management, LLC does not commit to updating any posted positions or commentary to reflect subsequent developments. While the information and reasoning used to form these opinions are believed to be from reliable sources, Redspire Wealth Management, LLC does not verify this information, and no guarantee is provided regarding its accuracy, completeness, or validity. Redspire Wealth Management, LLC disclaims any and all liability for actions taken or not taken based on the content of this site. No warranty, express or implied, is given in connection with the content provided.
Should I Time the Market?
You may have some extra funds to invest. Inevitably, the decision must be made when to invest these funds. If you follow the adage buy low, sell high then you may be tempted to pinpoint the lowest point in the market to maximize profit. You ask yourself, “Doesn’t it make sense to buy at the lowest point I can so I get the highest return? Can’t I just time the market?” There is a short answer and a long answer to this question. You can save yourself time and read the short answer (which you probably already know but will likely ignore or forget when the time comes), but I recommend reading the long answer to hopefully save you from making serious mistakes.
“Should I Time the Market?”
You may have some extra funds to invest. Inevitably, the decision must be made when to invest these funds. If you follow the adage buy low, sell high then you may be tempted to pinpoint the lowest point in the market to maximize profit. You ask yourself, “Doesn’t it make sense to buy at the lowest point I can so I get the highest return? Can’t I just time the market?” There is a short answer and a long answer to this question. You can save yourself time and read the short answer (which you probably already know but will likely ignore or forget when the time comes), but I recommend reading the long answer to hopefully save you from making serious mistakes.
The Short Answer
You probably shouldn’t because you will probably get it wrong and probably be worse off for it.
The Long Answer
The most difficult part of writing this part is that there is so much research, data, and studies suggesting that you shouldn’t time the market. What could possibly get the message across? Here are just a few considerations.
It is basically impossible to pick the lowest point consistently each year
The future is unpredictable and knowing exactly when the lowest point will be is going to require clairvoyance. There are about 250 trading days each year and only one day can be the lowest, which gives you a ~0.4% chance of picking the day correctly at random. Try doing that every year until you retire and you’ll realize it’s practically impossible.
You will likely be too scared to invest when the lowest trading day happens
The implication of the lowest trading day is that there is bad news about the economy which is causing stock prices to be lower – inflation is high, tariff uncertainty, unemployment is high, workers are on strike, and war is breaking out. Ask yourself, will you really invest when all the news headlines are predicting disaster for the economy? Howard Marks, a successful fund manager and investor, put it this way: when the time comes to invest, you probably won’t want to.
The cost of getting the timing wrong can seriously diminish your investment returns
People often hold cash while they wait for the “perfect” time to invest. Since it is practically impossible to pick the best (i.e., lowest) day to invest, there is an opportunity cost to holding cash. Historically, a diversified portfolio of stocks have a higher return than cash and the longer you hold cash, the greater the gap between your return on cash and the return on a diversified portfolio.
There is more than just the S&P 500 index to invest in
The S&P 500 index is generally what people mean when they refer to “the market.” The S&P 500 index consists of the 500(ish) largest publicly traded companies by market capitalization in the USA.
There is much more to invest in than just the S&P 500 index. I present the following table.
Source: Bloomberg, FactSet, MSCI, NAREIT, Russell, Standard & Poor’s, J.P. Morgan Asset Management.
Large Cap: S&P 500, Small Cap: Russell 2000, EM Equity: MSCI EME, DM Equity: MSCI EAFE, Comdty: Bloomberg Commodity Index, High Yield: Bloomberg Global HY Index, Fixed Income: Bloomberg U.S. Aggregate, REITs: NAREIT Equity REIT Index, Cash: Bloomberg 1-3m Treasury. The “Asset Allocation” portfolio is for illustrative purposes only and assumes annual rebalancing with the following weights: 25% in the S&P 500, 10% in the Russell 2000, 15% in the MSCI EAFE, 5% in the MSCI EME, 25% in the Bloomberg U.S. Aggregate, 5% in the Bloomberg 1-3m Treasury, 5% in the Bloomberg Global High Yield Index, 5% in the Bloomberg Commodity Index and 5% in the NAREIT Equity REIT Index. Annualized (Ann.) return and volatility (Vol.) represents the period from 12/31/2009 to 12/31/2024. Please see the disclosure page at the end for index definitions. All data represent total return for stated period. Past performance is no guarantee of future results.
Guide to the Markets – U.S. Data are as of September 30, 2025.
Here is how to read it:
· Each colored square is a different asset class: small cap stocks, real estate, commodities, cash, emerging market stocks, etc.
· Each column is a different year between 2010 and 2024
· The performance for each asset class is in the respective box
Take this example. In 2020, REITs (Real Estate Investment Trusts) were the worst performing asset class with a -5.1% return. More confident readers of this article might say that the negative performance in 2020 of REITs must reverse because they can’t possibly perform badly two years in a row and would see it as a buying opportunity. In 2021, REITs were the best performing asset class with a 41.3% return. But 2022 was a different story – REITs were the worst performing asset class with a -24.9% return. 2023 and 2024 weren’t much better relative to other asset classes.
The point is this: the asset class returns are all over the place. Forget about timing the S&P 500 index, how could you possibly pick which asset class is going to be the best performer year after year?
What Can You Do?
As alternatives to timing the market, there are two common and effective methods to start investing. Below are explanations of dollar-cost averaging and lump-sum investing.
Dollar-Cost Averaging
Rather than timing the market, you can choose to invest your funds on a set schedule in equal dollar amounts. For example, you have $3,000 and you decide to invest $1,000 in a diversified portfolio each month over the course of 3 months. This strategy is beneficial because it requires you to come up with a schedule and stick to it until the funds are fully invested. By spacing out your investments, if the market drops, you can benefit from this volatility because you may be buying at a lower price in the future. Psychologically, this can be a beneficial method since many people are uncomfortable with the possibility that their full investment will drop shortly after getting started and therefore end up not investing at all because they are waiting to time the market.
Lump-Sum Investing
Once you have the funds to invest, you can choose to invest it all at once. Research on lump-sum investing suggests that it tends to outperform dollar-cost averaging. There’s no guarantee that this trend will continue and it is not in every case that lump-sum does better than dollar-cost averaging, but so far it tends to perform better. To invest in a lump-sum, it is critically important to understand that short-term market volatility could cause the value to drop. Investors who can hold through market volatility and stay disciplined in the long-term will have a better chance of achieving a higher investment return compared to trying to time the market.
Now What?
It is one thing to know what dollar-cost averaging and lump-sum investing methods are, and it is another thing to know what makes the most sense for you and your situation. It is the belief of Redspire Wealth Management that creating a financial plan that addresses your specific goals, aspirations, and personal situation is an excellent method to start building financial security. A financial plan gives you the confidence to invest your money and to get you on the path to achieving your financial goals.
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The opinions expressed in any commentary posted on this site are solely those of the individual author and do not necessarily reflect the views or opinions of Redspire Wealth Management, LLC. These opinions are based on information available at the time of posting and are subject to change without notice. Redspire Wealth Management, LLC does not commit to updating any posted positions or commentary to reflect subsequent developments. While the information and reasoning used to form these opinions are believed to be from reliable sources, Redspire Wealth Management, LLC does not verify this information, and no guarantee is provided regarding its accuracy, completeness, or validity. Redspire Wealth Management, LLC disclaims any and all liability for actions taken or not taken based on the content of this site. No warranty, express or implied, is given in connection with the content provided.