You may have already started investing. You selected some investments from your company’s 401(k) and you contribute a certain portion of your paycheck towards the account regularly. You’ve decided that you’d like to get better returns.
How do you know what is too risky and what’s worth taking? What does diversification mean for your portfolio? Hopefully I can give you information to help you find the right solution for you.
Investing Risks – What are They?
First off, why should you take some risks with your investments? Quite simply more agressive investments could lead to bigger gains. Being a young investor presents a great opportunity.
Kristina did a great job of summing it up:
If we are lucky enough to start saving for retirement in our early twenties we can afford to take some risk, as long as we are investing for the long term. It is very important to understand the time horizon, investment objective, as well as potential risk of an investment before we make an investment purchase.
So you can be more adventurous with your investments to increase your returns.
Invest Your Money Wisely
Diversifying your investments can offset some risk. You want to build your income over time and not let it be subject to extreme volatility that concentrating your investments would bring. How you invest now will be different than how you invest when you’re 5 years from retirement. Usually investors seek aggressive growth in the long term and shift to more stability of their money in the short term. That’s because your goals are now different.
Instead of worrying about income building (which typically has more volatile and risky investments) you’re looking at income stabilization (meaning you won’t get high returns, but you want to have an income stream during your Golden years).
Asset Allocation
When you’re creating your investment portfolio, you’ll likely come across information about asset allocation. Basically asset allocation is a way for you to choose investments that have a chance of increasing your returns without putting your portfolio at great risk. What you actually invest in can vary greatly to what your friends may have. We each have our own risk tolerance so you may seek more aggressive investments than your buddy is a bit more nervous.
Between now and retirement you’ll most likely adjust your investment strategy to reflect your progress and goals. For example, as your net worth builds you may want to consider more ways to diversify your investments, perhaps getting into real estate or starting a business for additional income streams.
Still Be Careful
Just because you have time on your side to smooth out volatility doesn’t mean you want to be reckless with your money. Being wise with your money means looking for more aggressive investments that don’t put your portfolio at risk.
Thoughts on Investing
The good news is even if you start of contributing small, with some time you’ll build your net worth and investments. Having a system and sticking to it can do wonders for your accounts’ balances. How many of you are investing (not just for retirement)? What’s your investment strategy? If you’re just getting started, don’t forget to check out my previous posts:
