In both difficult and prosperous economic times, it can be confusing to determine the best ways to invest money wisely. The key steps are to make a financial plan, diversify your investments, determine how much money to allocate to each asset class, and to continually rebalance your portfolio.
1. Make a Financial Plan
You must determine your financial goals before you can decide which investments are best for you. How and where you invest will be determined by things like your age, the type of retirement you desire and your tolerance for risk. For example, if you are within 5 years of retirement your money should ideally be placed in lower-risk, more liquid assets than if you were 30 years away from the end of your career.
2. Diversify Your Investments
There are several different classes of money-making assets, including stocks, bonds, traditional savings vehicles, natural and other commodities, and real estate. Because all investment involves an element of risk, the wisest way to use your money is to diversify. This means reducing risk by spreading your investments out among several different assets and even within each asset class. Instead of putting a huge amount of money into one particular stock, divide that amount among many different stocks. Certain mutual funds can be a great tool for accomplishing this as these funds allow you to buy into a pool of hundreds of different types of stocks, bonds, and other assets.
3. Allocate a Percentage of Your Money to Each Asset Class
Just buying a little of each type of asset is not a wise investment strategy. It is also important to determine how much of your money should be put into each class. If you are willing to take some risk in exchange for the possibility of higher returns, for example, you might allocate a larger percentage of your investment portfolio to stocks and a small percentage to savings accounts like Certificates of Deposit (CDs). On the other hand, if you are looking for security over quick profits, you may want to dedicate a large part of your portfolio in liquid accounts, some types of bonds, and a only a tiny portion in stocks and natural resources commodities.
4. Periodically Reevaluate Your Portfolio
As your portfolio grows over time, you may find that certain assets have increased in value more than others. Allowing your portfolio to grow without rebalancing it means more of your money might end up in one type of asset, increasing the danger that you could lose a great deal if that industry crashes. This can easily happen with stocks, commodities, and even real estate. The solution is to consistently review your portfolio and keep it in harmony with your financial goals. If, for example, commodities now comprise 25 percent of your portfolio and you originally wanted them to account for only 15 percent, you should sell off some of those resources and put the money back into other asset classes.
There is not a “one-size fits all” way to wisely invest money because your fiscal desires and needs differ from others. Yet if you follow these four strategies, you will be most likely to achieve your long-term investment goals.
[via FinWeb.com]
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