RETIREMENT PLANNING: ALLOCATING AND DIVERSIFYING

The assets you select to invest in will depend on numerous factors, including your risk appetite and investment timeframe. The two primary factors are interrelated. Asset allocation and diversification are no easy task. At this rate, you will be needing the assistance of a financial advisor or planner.

In retirement planning, the more years you have left until your golden years, the higher your risk tolerance. So, if you have more or less 30 years until retirement, placing all of your capital into common stocks is a feasible idea. But if you only have a few years left, you may want to depend more on conservative investments.

Today, the discussion will revolve on two important things: asset allocation and diversification.

Asset Allocation

If you are not comfortable with choosing your own assets or beginning with a small amount of money, then consider exchange-traded funds or mutual funds. These two investments are similar as funds are collated together and the managers allocate all of the money in various assets. An ETF or mutual fund is useful if you have only a minimum amount of money to begin with. These funds enable you to give a small amount of money and posses a small portion of the fund. Not to mention ETFs and mutual funds are a great help in diversification.

There are different types of ETF and mutual funds, and two types of management as well: active management and passive management. Active management pertains to fund managers choosing stocks and making buy and sell decisions to generate the highest returns possible. Conversely, passive management simply invests in an index trailing the overall stock market like the S&P 500.

Of course, no one is stopping you from investing in other assets like stocks. You can buy around 20 stocks, a few from each industry. There is no exact number of stocks a person should hold in a portfolio, but some financial advisors suggest not lower than 10 and not higher than 20. By the way, going a bit higher than 20 won’t hurt you. Again, diversification. The companies in your portfolio should not be related or you will end up with (almost) nothing.

Diversification

A lot of financial advisers and investment books reiterated the significance of diversification, as well as how to best achieve it and how it can hinder returns. In essence, diversification is not putting all of the eggs in one basket.

Especially if you are mapping out your retirement plans, you must diversify your investments, regardless of the type of investments you opt to buy. Doing so is not that difficult, and there are several ways to diversify your portfolio even you have a minimal amount of money to invest. You make contributions to your retirement nest egg month after month, so the last thing you want to happen is for all of your savings to be gone, right?