Jun 8 2016
It is never too early to consider your retirement portfolio. While many people have a 401(k), the key to a solid retirement portfolio is diversification. The reason that diversification is recommended is that it helps stop the loss of all your assets in a sharp decline. The stock market is prone to plunges and losses. Essentially, you don’t want to put all of your eggs into one basket.
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At the same time, you don’t want to invest into everything. Smart retirement plans take research and consideration. Decide what kind of retirements you want to make, how diversified you want to be in each category and how much money to invest.
Utilize the 401(k)
This is where most people start when planning for their retirement. If your company offers to match your investments, you should invest up to the match. For example, if your company offers to match up to 6%, then invest 6% of your income. Otherwise, you are passing up free money.
Building the Portfolio
After you have invested in your 401(k), it is time to look for assets. These are things such as:
Stocks: It’s smart to pick a variety of stocks across the market such as:
- Small capitalization
- Mid-range capitalization
- Large capitalization.
At the same time, picking styles such as growth and value will help minimize the risk of loss. You should also consider international and global stocks. You don’t have to invest in just U.S. companies. Remember not to invest too much into one single stock.
A rule of thumb suggests that a portfolio should contain at least five stocks but no more than 10.
Bonds: These provide a good backbone if an area of more volatility tanks. You can expect at least an 8% return in bonds despite any losses in the stock market. For a more conservative bond investment, invest in government bond funds such as:
- Immediate term
- Short term
- TIPS (Treasury Inflation Protected Securities) fund
Cash: It’s recommended to have six months of expenses saved in cause of an emergency or job loss. Cash investment options include:
CDs (Certificates of Deposit)
Money Market Funds: These are mutual funds that have a high quality of investments over short term.
The hope is, if one area isn’t generating a good return, the other portions of the portfolio are growing. It’s also wise not to overinvest into one area. You are looking for variety, not quantity. If you are wondering how to invest properly, it’s important to align the investments with your time frame and financial needs, along with comfort level with possible risk.
For example, if retirement is closer, a higher allocation to less volatile investments may be better. This includes assets such as bonds and short-term investments. On the other hand, if you have a long time to invest, history shows use that stocks have higher growth over longer periods of time despite losses.
Review and Rebalance
It may be wise to keep in contact with an investment professional who knows how to invest properly. They can help monitor your portfolio. Sometimes, you will find that the selected variety isn’t yielding the returns that you desire. In this case, it’s time to rebalance so you don’t drift too far. This should be done every six month.
For example, if your target range for large capitalization stocks is 15% of your portfolio, but it has become 20%, you need to sell off 5% of the stock to reinvest in an area of your portfolio that has been depleted.
The hardest part about creating a diverse retirement portfolio is finding the right balance and the right level of risk. Diversification is a great strategy to reduce the risk of loss on investments. You must stay actively involved with your portfolio to ensure they are meeting expectations. Be ready to make adjustments if needed and your investments will surely grow over time.