Before you plunge right ahead and start investing, you should first learn how to choose the right investments for your portfolio. Most financial advisers say that when you’re younger, most of your investments should be in ownership vehicles. These include stocks, real estate, and even running your own business. These might be volatile investment vehicles but the chances of growth are also high. Besides, in the event that your portfolio loses value, you still have time to recoup your investments.
How much of your portfolio should you put in ownership investments? The general guide is to subtract your age from 110 and answer is the percentage of your portfolio that you should allocate in ownership investments. So if you are 33 years old now and you subtract that from 110, the answer is 77. This means that 77 percent of your portfolio should be composed of the riskier ownership investments. The remainder can be placed in the “safer” investment vehicles like savings accounts and bonds.
As you may perhaps notice, the older you get, the less you are going to allocate for riskier accounts. This is because the nearer you are to retirement, the less time your investments are going to be able to recoup should their value plummet. Thus, you need to have more in safer investment havens. But since you can expect to live more years after you retire, you still need your portfolio to grow so you need to maintain some of your assets in ownership investments.
Aside from your age, you should also diversify your investments. This is has been the code practiced by many successful investors throughout the years. Allocating your assets in stocks, bonds, mutual funds, real estate, and small businesses will ensure that your portfolio remains relatively stable in case one part sustains a hard hit. The more diverse your portfolio is, the better your chances of having a restful sleep at night since you won’t have to worry that everything you have put in one asset class is in danger of going under.
Finally, you should make it a point to focus your investment on things that you know. While the importance of diversifying your investments cannot be underestimated, you should still invest more in vehicles that you are most knowledgeable about. For instance, if you have been exposed to stocks all your life then it only makes sense that you concentrate a lot here. However, if your parents have been running rental properties since you were little and they trained you early on how to run it—like asking you to get rent from the tenants—then you might be most comfortable investing in real estate. The whole idea is to put your money in businesses that you are most
comfortable with.
These are crucial steps you need to take before you start putting your money in any investment. When you’ve already set up an emergency fund, paid down your debts, start putting your money in retirement accounts, know the tax implications of investing, and chosen the right mix of investments, you are well on your way to investing successfully.
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