Yesterday we discussed a quick way to get started on planning your retirement, regardless of age or how much you have saved. If you missed part one, we certainly recommend that you click here to check out part one and get caught up.
We left off after counting up your current assets and making some rough estimations on how much they will likely be worth in the future. Now we’ll take a look at how you can diversify this money to maximize it’s earning potential. It’s recommended that you undertake something called “asset allocation”. What this is, is spreading your money into various kinds of products that have different rates of return attached to the investment. The reason for this is that it allows you to have some more conservative investments, (ex: a savings count with a low rate of interest earned), while allowing you to put some money into riskier endeavors that offer higher rates of return. For example, you could put money into a savings account with little or no risk associated with it, money in bonds that offer a higher rate of interest but also have more risk, and also money into stocks that have the most risk but often a much higher rate of return.
Most financial advisers worth their salt will recommend this practice so that your investments are diversified. Additionally, you should build on this technique. On top of investing in each type of major category (savings accounts, bonds, stocks, etc), you should also invest in their sub-categories. For instance, invest in mutual funds that invest in several different types of assets, from big brand name companies, to smaller company’s stocks and bonds. Additionally, you can (and should) even invest in things like gold and real estate. By diversifying your investments, you help protect yourself from fluctuations in the marketplace. You need to be careful about putting too much money into one area or the other. Many individuals are betting a lot of their retirement on stock in their employer’s company. While it’s great that you believe in your company, it can be risky as there is always a chance your employer could fail.