Diversification is Key
But, the lure of potentially high rates of return can easily skew a novice’s objectivity, resulting in unrealistic expectations and unnecessary exposure to risk. That’s why it’s important to regularly meet with a qualified financial professional to review your personal financial situation, taking into account your short- and long-range goals. During these meetings, you’ll formulate answers to the following questions:
• What do I wish to accomplish with my money?
• How can I keep inflation from eroding the purchasing power of my money?
• How much risk am I willing to take with my money?
Professional guidance can help you create a well-diversified savings program with assets placed in investment classes covering a wide range of the risk/return spectrum. Examples of some investment vehicles include stocks, bonds, mutual funds (which can comprise stocks, bonds, or a combination of both), certificates of deposit (CDs), savings, and money market accounts. Each investment class tends to react differently to changes in financial markets and to the economy as a whole. Thus, by diversifying your portfolio, risk is spread over a broader range of investments, potentially minimizing the impact of downturns in the economy or a particular market sector.
Each individual situation has its own set of circumstances that require constant re-evaluation. Factors such as your age, income, expenses, family responsibilities, and risk tolerance will certainly change over time. In addition, it’s important to recognize that past performance of any investment is not indicative of future results, and shares may be redeemed for more or less than their original value. Investments performing well above or below your expectations may create an unbalanced portfolio, oftentimes resulting in an investment mix that is inconsistent with your original objectives.
Regular reviews with a qualified financial professional will help ensure your portfolio is properly diversified, balanced, and performing in accordance with your investment goals.
Clearing the Path to Retirement
Proper diversification also dovetails with the necessity of planning for retirement. The combination of Social Security and company retirement benefits is often insufficient to provide the necessary income to enjoy a comfortable retirement. That's why it's never too early to start thinking about saving for retirement.
Along your journey, you're bound to encounter an array of financial challenges. You must plan ahead by setting goals and deciding how they will be met. Retirement planning means not only getting ready for a lifestyle change, but also accepting a changing financial picture.
A successful financial strategy can mean placing your spouse of some fifty years in a nursing home with a pleasant, home-like atmosphere and superior private care vs. being forced to choose a “no-frills” nursing home. Or, it could mean the difference between dining out more frequently vs. preparing more meals at home. Many retirees find themselves balancing between having a sufficient lifestyle and lacking some of the comforts that make life easier. This “give and take” could be alleviated if the proper planning, savings, and investing are done ahead of time.
New Opportunities
The fact that Uncle Sam allows tax-deferred accumulation to save for retirement through certain funding vehicles, such as IRAs and employer-sponsored retirement plans, provides an ideal stimulus for increasing the amounts going into them.
If you are financially independent at retirement, it will never be a period of boredom and disenchantment. Rather, it can become a time of new opportunities when you can try a second career, develop a new lifestyle, or pursue new dreams and goals. You can start now to make your retirement years your most stimulating, fulfilling time ever – truly your golden years. It all starts with diversification.
(Mr. Wallace holds NASD Series 7 (General Securities) licenses and Group I and IV Life-Health Insurance Licenses. He is a Registered Representative of MML Investors Securities, Inc., an Investment Advisor Representative of Spectrum Strategies, LLC, and an Investment Advisor Representative and Registered Representative of MML Investors Services, Inc. You may reach him @ ejwallace@finsvcs.com or visit his website at spectrumstrategiesllc.com.)
