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Running Your Railroad Retirement Like a Railroad

Retirement Financial Planning Investing

Class 1 Railroads are categorized for investment purposes as transportation companies. After all they take goods from point A and deliver to Point B. In exchange for providing that service, the railroad collects a fee. The basic of definition of a transportation company. However when you look closer at railroads, they are actually well diversified conglomerates that have multiple revenue streams from different sectors of the economy. Class 1 railroads receive revenue from commodity producers, chemical manufacturers, finished goods companies, automobile companies, etc... The railroad if positioned properly isn't completely dependent on one revenue stream to achieve profitability. It is this mentality that railroaders should adopt when it comes to building their railroad retirement portfolios.

Let's illustrate the diversification of railroads by looking at a recent US Rail Traffic Report:

From looking at the Rail traffic data above there are some takeaways that standout from the obvious overall rail traffic being down 9.1%. You notice the breath of revenue streams for Class 1 railroads. They have many touch points in the US economy. The chart shows the importance of diversification  for their overall success. Imagine if a railroad was solely focused in transportation of coal. Where would that railroad be today? It important point to comprehend,and railroads know this more then anyone, that the economy moves in ever changing cycles. Understanding that the US economy is constantly changing, railroads have built a business that is made to take advantage of these cycles.

After understanding the operating structure of Class 1 railroads, lets study the investing cycles and the importance of diversifying your railroad retirement portfolio to achieve to that steady consistent growth with limited risk.

Looking at the above chart you can see how important diversification is to a overall portfolio. There is no asset class that is continuously the top performer and vice versa there is no asset class that is always at the bottom. If you ran a railroad then you could replace Emerging Market Equity with Coal for example or High Yield Debt with Intermodal. The point is every investment has it time in the sun and then it goes away only to eventually repeat the cycle again. Economists and money managers can make their best guess when the next up cycle will occur but in reality they are just guesses. It is only by diversifying your portfolio with proper asset allocation can you achieve steady efficiency in your investments.

Diversification can help an railroader manage risk and reduce the volatility of an asset's price movements. Remember, however, that no matter how diversified your portfolio is, risk can never be eliminated completely, just as the railroads are still effected by the strength of the overall US economy even though their revenue streams are diversified.

Here are four good reason to diversify your retirement portfolio:

  1. Lower Risk. The number one reason for diversifying is that it lowers your overall risk. The more you spread your assets out, the less likely it is that a single event will negatively impact your portfolio.
  2. Different investment styles. There are multiple types of investment strategies.
  3. Limits home country bias. You force yourself to work past your home country bias. This opens you up to international markets, which ultimately diminishes your risk during times of domestic economic recession.
  4. Provides more opportunity. Ultimately, diversification opens you up to more opportunities. While additional opportunities could theoretically expose you to more risk, the hope is that you’ll make savvy choices that bring balance to your financial portfolio.

When you are ready to diversify your railroad retirement portfolio. Most individuals will buy a mix of mutual funds, stocks, bonds, and ETFs in order to achieve asset allocation. At Highball Advisors, I achieve diversification strategies through the use of low cost passive ETF models that track major indices. The models are chosen based on my clients risk and goals. After the model is implemented for my clients they require continual attention to spot inefficiencies that might require re-balancing, tax harvesting, etc..

Talk with your financial advisor about diversification strategies for your portfolio with them to help you achieve your financial goals. Also feel free to reach out to me and schedule a free 15 minute meeting to understand the importance of diversification.


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Photo by James R Doughty

Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. Highball Advisors encourages you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Highball Advisors, and all rights are reserved.from Highball Advisors, and all rights are reserved.