A balanced and diversified portfolio is the key to successfully navigating today’s financial markets. Individual investors need to be versed in asset allocation and understand that they are their own best advocates when it comes to their finances.
Personal Investment Goals
Everyone has unique personal financial goals that should inform their investment strategy. Your age, timeline, family, and what you want to spend your money on all have an impact on how you should invest. Common investment goals include:
- Saving for retirement
- Saving to buy a house, car, or vacation
- Investing in your children’s education fund
- Preserving a large amount of wealth
- Growing a small amount of savings
Your goals and their timeline will all change what you should invest in, but there are a few basic assets you should consider first and foremost.
#1 Index Funds
Index funds are Warren Buffet’s preferred way to invest in stocks. An index fund is a collection of stocks designed to more or less track an index (i.e., the S&P 500) as a whole, by investing in all or a substantial portion of the stocks that make up that index.
The logic behind index funds is that stock markets as a whole have a history of tremendous growth. Though they go through ups and downs with the economy, over the course of decades, they provide greater growth than just about any other asset.
Given the above information, why wouldn’t you put all your money into index funds? When you’re investing a small amount of money that you need to grow over the next 40 to 50 years to retire, that makes perfect sense. But that’s where you have to factor in timing and risk tolerance. There’s always a chance that markets could tank right when you need the money. The closer you get to making a withdrawal, the more conservative you should become.
Bonds are one way you can scale back your risks. Individual investors can buy both government and corporate bonds – effectively a way for these organizations to raise funds through debt.
Bonds have their own risks, such as negative real interest rates, when bond yields are lower than inflation. Bonds don’t offer such great yields, so interest rates eat away at the yields pretty steeply.
One inflation-proof asset that also lets you curtail your risks is gold bullion, and it’s simple to get. You can buy gold online faster than you can buy into an index fund. Gold has a long history of rebuffing the eroding effects of inflation, not just keeping pace but proving more valuable over time.
Gold is another way to reduce your risks. It’s a stable store of value with a long history of trust for investors. When other financial products carry too much risk, demand for gold climbs quickly.
The time to buy gold depends on external factors like the market, as well as your own risk tolerance. If you don’t have the time or the stomach to wait for a recovery in stocks, put your money in bonds and gold.
Asset allocation is all about spreading risk and maximizing returns.