One of the big questions on the minds of many middle-age individuals is the question of how to retire. Retirement is a phase that can change almost everything about your identity. You know retirement is not just about reaching an age limit that requires you to take a rest. The big guys could suddenly find a reason to fire you at any moment. This is not a popular opinion but getting fired is a form of retirement. Many sermons have been preached about retirement. In fact, you would find a thousand and one tips on how to retire well if you search the net. One thing that remains constant in every good retirement plan is the need for investment.
“The sleep of a worker is sweet” when the worker has invested
Retirement is that period where people get to go on all the vacations they missed while chasing their money. The perks and comfort of retirement can only be earned by investment. According to Mike Lewis, the key to a happy retirement is to have enough income that can afford a stress free life. The amount of income required depends on the lifestyle you desire after retirement. That is, the kind of sleep you want to have after all your hard work.
Investment is simply saving as much as you can for the future. It is choosing to have a sweet rest after work. Saving is a very important habit that is often difficult to imbibe. There are too many distractions on a tug of war for your money. Of course it is your money and you get to decide what to do with it. Fact is that you would also have to live with the consequences of not saving at all. The future is uncertain, but investing makes is the best preparation you can have. Before you read any further, have you made an investment plan? If you get fired today, will your current investments bring you relief?
What is an investment Plan?
Let’s begin with the good news, it is never too late to create and implement a suitable investment plan. Investment plans are much more than just opening savings accounts and buying shares randomly. It’s a strategy that requires you to consider many factors. Investment plans begin with definite goals and are usually bound by a timeframe. These two are the foundations of every investment plan as they determine almost everything. Here are a few questions to help you with your investment plan.
- What’s your goal? That’s the first question you must be able to answer. To retire early? A house? A boat? Trust funds?
- How soon do you want to reach your financial goal? Short-term goals may require an aggressive strategy; you may choose to slowly generate wealth with a subtle strategy.
- How old are you? Young people can take more risks as they have more time to recover from unexpected losses
- How much money do you have or are you willing to put aside? An investment should help you and not kill you
- What risks are you willing to take? Sometimes the less you risk, the less you make and other times, careful steps save you many troubles
- Have you weighed all your options? Seek professional advice.
- What do you want to invest in? After weighing your options, which one meets your goals the most? Well, nobody ever said you can only choose one!
Should You Put Your Eggs in One Basket?
No, eggs break easily and it always safer to have them in different baskets. That’s what diversification of investments is all about- putting your eggs in different baskets. A diverse investment is one made up of a mix of investments. This means the investor has spread his assets to different investment types; stocks, bonds, mutual funds and the sub-sectors within. Have you thought about investing in pharmaceuticals, entertainment etcetera?
Why You should consider A Diverse investment Portfolio
As a rule of thumb, no matter what your goal is, you would need to diversify your investments no matter what. Financial advisors, investment bankers and economists will always advise that a diverse portfolio is safer. Do you need to be told the reasons? Well, here they are;
- To minimize risks; when you put all your assets in one direction, you stand the higher risk of losing it all. But the risk of losing from many is very minimal. This way, if one portion of your portfolio is declining, the others would be gaining wealth. Anyway, no amount of diversification will eliminate all risks but it will help you rest better.
- To balance your investments; investors are often tempted to chase investments that are momentarily performing well. When there is a downturn, they tend to move their money to lower-risk operations. A diversified portfolio keeps you balanced on every side. It has higher propensity of making gains in the long run.
- Diversification can help limit overall losses from investments; like the cliché of putting all eggs in one basket, diversification is a safety measure. If all your assets are tied up in one investment, you will have a lot to worry about. If something goes wrong, you’ll likely lose everything. When you spread it out, it is like providing a protection for yourself. If you lose on one side, you’ll still be able to rely on gains from other investments.
How To Diversify Your investment
Diversification is basically asset allocation and asset allocation is simply spreading out your assets. Assets can be divided into different investment classes such as stocks, bonds, real estate, cash, commodities, foreign currency, metals etc.
There are basically three classes of assets for investment- stocks, bonds and cash alternatives. Real estate, precious metals and the likes are minor classes.
Stocks; a stock owner is a part owner of a company. Stocks have overtime provided the best returns ok investment. However stocks are volatile and must be handled carefully. It’s not necessary try to pick the best stock. You can just buy a fund that matches the entire stock market, or a segment of the market.
Bonds; Organizations issue bonds to raise cash to fund operating expenses. In return, they promise bondholders a guaranteed return on their cash. There are government, municipal, corporate and junk bonds. They are profitable and are considered to be less risky than stocks.
Cash and cash equivalents; they include money held in savings accounts, Certificates of Deposit, money market funds, and treasury bills.These are generally considered to be the “safest” investments, meaning they won’t lose their face value. There is a risk with keeping too much cash in your portfolio. Cash and cash equivalents generally don’t keep pace with inflation over the long term.
The investment classes other than these should comprise a smaller percentage of your portfolio. Experts may have contrary opinions. Hats probably because they know how to go about it.
Real Estate Investments; this is an age long investment class. Unless you have the time and ability, it’s best to avoid it. Rental properties often require a lot of hands-on commitment and knowledge. There are other ways to do it. You can invest in crowdfunding platforms and Real Estate Investment Trusts.
Precious Metals; precious metals such as good and silver are often worthy investments. However, they dont generate income like dividends. Gold is taxed as a collectible unlike other investments. Precious metals require safe storage and maybe additional insurance costs.
Assets can be allocated in different ways. Perhaps you need to learn the different ways of allocating your assets.
Asset allocation across classes; Stocks have the highest growth potential together with the greatest risk. Bonds are the border line of the three; the modest, less volatile class. Cash alternatives have the least risk and least returns. Now you see that each class is unique and would perform differently in the same market condition. Splitting across these classes helps to ensure balance.
Asset allocation within classes; after diversifying across classes, you need to diversify again. Stocks have the widest opportunities for diversification. You could go domestic or international or choose to invest in large, small medium or small-caps companies. There are also different sectors and industries to invest in. This is where the mutual or exchange funds concept comes to play.These funds generally hold shares in many different companies. There are also target date funds geared towards retirement planning. The target date approximates the retirement date of the investor.
Allocations can be done in different percentages say, 70% stocks 20% bonds, 10% in other classes. They are usually done based on preference, desired goals and levels of risks you are willing to take.
There are steps to diversifying assets and you need to follow them thoroughly
1. Allocation Target Define your
Every investor must have a target. The asset allocation target is the goal you hope to achieve from your diverse investments. This target can be said to be the benefit you expect from all your various investments. It boils down to the lifestyle you want to have at retirement or if you are fired. That is, your target must be time-bound. You also need to evaluate how much tolerance you have for the market fluctuations. So you can know the level risks to take. Once you have your target set, you can take guided steps.
2. Map out your Diversification strategy
The wavering nature of the market affects different investments differently. A strong year for the stock market may be a weak bond market year. You would have to have a detailed map of how you intend to allocate your assets. Choices are usually based on risk tolerance, years until retirement, and other factors. A person just a few years from retirement might shift money out of stocks and into bonds or cash for a more conservative allocation.
3. Define your investment timeline
How much time do you have before you retire? You may want to aim high so you’ll be able to retire when you want. You would also want to start early so you can live how you want after your retirement. The younger you are when you start saving, the more you will have in the end. If you seem to be running out of time, you would have to adopt a different strategy. Answer the question now before you invest; how much time do you have?
4. Decide between stocks and/or bonds
Stocks have the ability to outpace inflations but their volatility makes them scary. They are often considered to be investments for long-term growth. Bonds which have less returns are much more steady. So, investors must decide which option is most suitable. You may not have to choose, a profession can guide on what to do.
5. Percentage of other investment types
Don’t stay limited to stocks and bonds. There are different investment opportunities but they should have a smaller percentage. It is safe to limit them to 5 to 10 percent of your investment portfolio. So work out your percentage with great caution. You must make sure you consider the pros and cons attached to.the choice you make.
6. Balance and rebalance your investment portfolio
Over time, your investment portfolio may stray from your ideal asset allocation. Events like recessions can drastically affect the balance of diversified investments. Rebalancing is simply bringing your asset allocation back in line with your preferences. If need be, you sell some off, buy others to create the balance you desire.
7. Reviews are a necessity
Whichever diversification strategy you use, you would need to make regular reviews. Always check especially when your financial circumstances change. As you approach retirement, you may need adjust your allocations. It is important that your diversification strategy always reflects your goals and time horizon.
Diversifying your investments can help you see appropriate growth for your portfolio. It would at the same time limit some of your investment risks. Diversification is the only way to get the best of both worlds; less risks and increased returns. Take the time to consider your investments and your allocation today. You might be surprised at what you can accomplish. That’s the perfect way to achieve your dream retirement life.