Retirement planning 101: 5 ways to diversify your portfolio
Depending on when you’re reading this, perhaps, you may be looking far into your future and feeling like your retirement is still far away. But, as far as this may still be, it’s never too early to start planning for it. Remember that for you to finally enjoy that prime season in your life when you’re no longer tied up with work, you also have to ensure that you’ve got enough savings to help finance your expenses. You shouldn’t have to feel so dependent on your pension, especially if you feel like this may not be enough to cover your outgoings.
According to Learn About Gold, one of the best ways you can plan for your retirement is to start diversifying your investment portfolio. You need not only include cash and stocks, but also precious metals, if this is what suits your fancy. The key is to have as much assets as you can, so you’re not putting all your eggs in one basket. You can think of it this way: should one of your investments fail or crash, you’ll need to give yourself that protection to ensure that you still have growth in your finances. If you don’t diversify, then you may possibly lose all of your hard-earned money should your chosen investment crash.
Fortunately, there are so many asset investment forms that you can now opt for so you can diversify your portfolio. You don’t even have to be an expert at all of it all at once. You can take it one investment at a time, and then learn your way around those investments as you go with the help of relevant resources, such as those provided by sites like Learn About Gold.
That said, if you’re ready to protect your retirement and prepare for it, keep reading to learn more about the different ways you can diversify your asset and savings portfolio.
A brief background on asset diversification
What does it mean to diversify your assets? Perhaps, you may have heard about this tip too many times before, but never really given it much thought up until today. As a quick background, diversification is one of the most common tips that’s always repeatedly advised by financial advisors, managers, and even individual investors.
This means having varied assets as a part of your investments, such that the variety that you have will give you more financial security. In effect, you can yield higher returns simply because you’ve got varied assets whereby other investments may work strongly than the other. If you’ll have assets that end up negatively or with low returns, those with higher ones will cover up the losses made on the assets with lower returns.
This can give you financial security as you save and prepare for your retirement.
Tips on how to diversify your asset portfolio
Now that you’ve got a brief background on what it means to diversify your portfolio, you should be ready to learn about the different means to do so. These would include:
- Make it a habit to invest regularly
Early in your life, you should make it a habit to invest regularly. This means that you should already be frugal enough with your expenses, such that you don’t spend more than what you earn. When you receive your monthly salary, no matter how small this may be, always set aside a little amount solely for your savings or investments. This should be the amount that you’ll allocate if there’s an investment you’d like to purchase, like real estate or stocks for instance.
Making it a point to save, no matter how small the amount may be, can help ensure that you do put in savings regularly. Eventually, this amount will add up. The last thing you’ll want to happen is to be stuck in a situation wherein you’ve got no savings coming in, and your income is also at a deficit because you’re spending way more than what you earn.
The earlier that you make this a habit, the more that you can continue doing this up to your last paycheck, before you retire.
- Bring in many different investments as a part of your asset portfolio
A key technique for diversification is to bring in many different assets to form a part of your asset portfolio. If you’re unfamiliar with what investments or assets are the strongest at the time being, you can always do well with the help of a financial advisor to give you information-based decisions.
At present, some of the strongest types of investments include:
- This is one of the safest and most common types of investments that even beginners can do. It’s really as simple as putting in some savings in the bank. While the returns may not be that high, the risk is also significantly lower. This also gives you liquid money that you can immediately withdraw in the event that you may encounter a financial emergency.
- Index or bond funds. These refer to the fixed-income securities that make your asset portfolio more secure in the long run. When you add in index or bond funds, you’re able to provide a hedge with your investments against the volatility of the stock market. Should you suffer losses, these losses won’t dive to dangerously low levels, such that it may be hard to earn back what you’ve already lost.
Index or bond funds are also great for those of you who may still be starting out with earning, wherein you may not have as much funds yet. These usually have low fees, which also means higher profit returns for your personal earnings account.
- Real Estate Investment Trust (REIT). This refers to the companies that are responsible for owning and financing real estate that’s income-generating. But, this doesn’t come from a single business as it’s coming from resources pooled together from various real estate companies or investors. When you invest in an REIT, you can earn dividends from real estate without necessarily having to purchase a real estate per se. The dividend that you’ll receive will also be proportionate to the shares that you’ve purchased for every property.
The different types of REITs that you can invest in are along the lines of the following:
- Equity REITs. These are those that are owned and managed by real estate investors that are income-producing, not by reselling, but by putting them up for rent.
- Publicly Traded REITs. These are usually found and listed on the national securities and exchange, where they can be bought by private investor,s like yourself. They’re also controlled by the Securities And Exchange Commission, which gives you that higher element of security.
- Private REITs. Because this type isn’t listed on the securities and exchange commission, they can only be invested by institutional investors.
- Exchange Traded Fund (ETF). This refers to a type of security that makes use of a sector in business or a commodity that can be bought or sold in the same manner as stocks are. These can be anywhere from single or individual commodities, to more pressing ones, like a diverse collection of securities.
These are the different types of ETFs that you can invest in:
- Bond ETFs. These can include government bonds, as well as state and local bonds, also referred to as municipal bonds.
- Commodity ETFs. These are commodities, like oil or gold.
- Inverse ETFs. These are sold so as to gain from possible stock declines, also known as shorting stocks.
- The fear of the stock market shouldn’t discourage you from investing in it. Purchasing stocks is another way to grow your money and diversify your assets. But, this can also be quite tricky, given that assets are very volatile. A good way for you to go about this is to learn the basics of stock investing first. Once you get the hang of it, that’s when you can go full force with your stock investments. To ease your worries about stock investing, here are some tips that’ll come in handy especially for beginners:
- Get educated about the stock market. You can’t expect to make it big with investing in stocks if you don’t even equip yourself with some background knowledge on the stock market. When you give yourself ample knowledge on stocks, you’re also reducing the likelihood of falling into the ill-fates of negative return, should the value suddenly crash.
- Start small. Don’t throw all your money at once with certain stock investments if you’re not even comfortable with what you’re doing. Remember that your goal here is to diversify so you can secure your financial future. Hence, you’ve got to be a little bit more cautious with your move. This entails first starting out small, so that the risk won’t be as high.
- Be consistent. If there’s one consistent rule that you should follow when it comes to investing in stocks, it’s this: buy low, sell high. You have to develop a plan, so you can be consistent about when you’re going to buy more stocks so that they’re at the cheapest price. That way, you can maximize your profits when you sell or withdraw them once they’ve reached their peak amount.
- Spread your wealth
Spreading your wealth doesn’t just mean putting your money into different types or kinds of investments. It also means putting your trust in different companies. Remember that businesses that put their shares up for sale to the public are also highly dependent on the current economic situation. But, there are some companies or businesses that are more stable, also because they’re more popular. They’ve long been in business and their stocks may also be more expensive.
So, another strategy that you can use in spreading your wealth is to put your trust in different companies. In doing so, the stronger and more prominent businesses can cover for the losses that you may experience with the cheaper and smaller ones.
- Use fixed income ladders
As the name implies, fixed income ladders are those investments that give you a fixed income. Your diversified asset portfolio should include assets that are classified as fixed income ladder so that you’re guaranteed to have income coming in for your savings. No matter how little this may be, in the long run, as you prepare for your retirement, it’s an amount that still adds up. So, it’s not to be given a blind eye to.
These kinds of bonds reduce the risks brought about by fluctuations in the interest rate. This means that the movement of the value goes up or down, in a direction that’s opposite to the movement of the current interest rate.
When you have this kind of asset in your portfolio, you’re able to proportion your income into a series of annual maturities. This enables you to grow your asset value more towards the long run for more stability.
- Choose investments with different returns
Along with the other metrics that you may also consider, one very effective way is to choose investments that have different rates of returns. Don’t be tempted to focus only on those that promise high returns as these also mean that they’ve got a high risk.
When you balance out with low returns, this small amount will still be enough to counter possible losses from the high returns, but high-risk investments.
The key tip for you to follow is to purchase stocks from across different sectors. For instance, don’t merely focus on the tourism industry. Otherwise, when that industry suddenly shuts down, then you may lose all of your investments. Spreading your investments across different sectors gives you more financial security, especially during unprecedented times, like the pandemic, wherein some sectors suffer more losses than others.
Information is power, and now that you’re equipped with all these information, are you now ready for a more stable retirement? When you’ll no longer have as much income coming in as you may be doing now that you’re earning, it’s very important to secure your financial future. You can’t enjoy your retirement when you’re always constrained and fearful of whatever financial bump may come along the way. And, it’s never too early to start. There’s strength in the saying to never to put your eggs in one basket, and this holds true for asset diversification. With the tips above, you can protect your assets so that you’ve got a leverage for growth, should one form of investment fail or decrease in value.