4 Great Ways to Diversify Your Investment Portfolio
Investing in your future will take focus and effort. To get a sizable portfolio put together, starting early is a good choice, but any investment, diligently fed, has the potential for growth over time. That being said, money is both charged and personal, so be ready to understand how your comfort level will influence your choices.
Understand Your Volatility Tolerance
Volatility or risk tolerance refers to your heartburn level when your balance goes up and down. If you choose to invest in cryptocurrency, you may be euphoric when your balance runs up and fall into despair when it drops.
A well-balanced portfolio does include some crypto; the benefits of being a part of this marketplace are well-known. However, if you can’t stand to see your balance drop, consider a “buy, hold, and don’t look” strategy. Purchase a product with some history and hold it until you get used to the peaks and valleys. Track it over time and buy more when you’re comfortable.
Find Your Niche
Consider buying stock with your after-tax dollars. A simple phone app can allow you to put just a bit of money into the market for the fun of it. Pick a portion of the business world that interests you and track the businesses that support it.
For example, current trends indicate that wine is actually a part of the market that has great potential; millennial wine drinkers are pushing the growth of this industry and more companies are going public. Study up on those companies that are on the exchange and buy stock in a product that you enjoy anyway.
The stock market is huge and niches can be found in nearly every area of interest. Be ready to hone in on an area that holds your interest and become your own expert. The learning will be worth it and the payouts will be myriad!
Use Your Employee Benefits
If your employer offers an IRA, make sure you put in enough of your own income to gain access to the full match. Depending on where you are in your employment journey, you have the time to go for some bigger gains by exposing yourself to a bit more volatility.
For those who don’t have the tolerance for volatility, consider your diversification options by splitting your contribution from your employer’s contribution. For example, you could put your contribution into market index funds that rely on the big companies in the exchange for slow, steady gains. Take your employer match and invest in funds that include emerging markets and international funds, which may be more volatile in the short term but pay out at a higher rate over time.
Consider an Individual Retirement Account
If you can max your 401(k) and want to further increase your retirement funds, set up an IRA. For money that you can access at 59 and 1/2, you will want either a traditional IRA or a Roth IRA.
The fundamental differences between the two are
- a traditional IRA gives you a tax break now but you have to pay taxes on the money when you take it out
- a Roth IRA is funded with post-tax dollars
You won’t pay taxes on money taken from a Roth IRA, whether you’re withdrawing the gains or the principal. There are limits to how much you can put in any IRA each year. However, if you own your own business and don’t have access to a 401(k), setting up multiple IRA’s is a good way to build retirement savings for your future.
An IRA can also be set up for your spouse. For example, if you and your spouse have children and your spouse is not earning a paycheck at present, the IRA you set up for them can enable them to build retirement savings while caring for the family.
Knowing how much volatility you can manage is key to building an effective portfolio. If you know that you would be tempted to sell as soon as your account balance drops but really want to have some money in volatile markets, don’t check your balance. Be willing to let that money ride. Put more of your dollars into funds that are slower to rise but less likely to fall.