We all want to be set financially in our golden years; however, most of us do not really know how to get there. Everyone tells us to save our money and invest, but it is not that simple. Understanding how to invest and where to invest requires research. In uncertain times, like the present, we really need to ensure our money is protected and maximized in returns.
Savings is money you save to build security for your future. This is money you put aside for a rainy day. This money is easily accessible without any penalties. Investing is money that you put into accounts to make it multiply. The money in investment accounts is not easily accessible without monetary penalties. The difference between these is the type of holding pen for your money.
If you are waiting for the right time to invest, remember compound interest is like a snowball that grows larger and larger the longer time it has to build. The sooner you get the snowball rolling, the better your snowman will be at the end. So, it is never too soon to start investing, even if you only have a little to invest.
Individual Stocks
These are fun and exciting, since you get a name of a company that you can follow, but these types of stocks are also risky because you have to research heavily and then follow trends and know when to get out if things go south. Your portfolio should be no more than 10% of individual stocks.
Mutual Funds
This is the traditional retirement investment account. Mutual funds are a basket of stocks and bonds that are diversified into several different categories to ensure your money doesn’t go away if we have issues financially. In one transaction you purchase a portfolio that has several different stocks and bonds and you can choose your level of risk. If you are retiring fairly soon, you will want to lower your risk and be fairly stable with your assets. However, if you are in your 40’s, you may want to be 50/50 on your risk and safety levels, which allows you the chance to make some good money, but still have a cushion if the stock markets go down.
What to Invest In
It is important to invest in what you are comfortable. The rule of thumb is to invest in stocks at your age minus 100; i.e. if you are 30, then 70% of your retirement money should be devoted to stocks and 30% should be in bonds. However, if you are not very risk averse, maybe consider doing 80% in stocks to have a chance to grow your portfolio. If you have a mutual fund, they will move your stocks around, because they are professionals and they will know when to divert money to stocks or bonds as you age and your portfolio nears maturity. But it doesn’t hurt to have a few individual stocks in place to play with as well.
