Investing is an important part of your financial health. Plus, the right investments can prepare you for a comfortable retirement. It can also create financial security that can enable many other beneficial activities throughout life.
At least investing can do these things when it’s done right. The problem is choosing the right options from the infinite number of investments available.
Many professionals try to be stereotyped and provide their “11 Herbs and Spices Recipe for Success”. These can be helpful, but ultimately each individual must tailor their investment strategy to themselves.
With that in mind, here are some key investment rules, a list of some examples of different investment options, and some questions to ask yourself when selecting the best investments to prepare for retirement.
The three goals of retirement
When talking about retirement, most goals, takeaways, and activities focus on three core principles:
- Security: Investing can provide a sense of financial security.
- Revenue: Investing can generate a constant income.
- Capital growth: Investing can increase wealth by buying, holding and selling growth assets.
Typically, all investments revolve around these three fundamentals in one form or another. Depending on your strategy and your age, one or other of the three may be predominant. It’s also important to realize that you can prioritize one over the other at different times in your investment timeline.
Different types of investment categories
In addition to understanding the three basic motivations behind investing, it is useful to differentiate some of the different categories that most investments can fall into. Most investments are either growth oriented or defensive.
Growth investments are long-term investments. They aim to accumulate wealth and tend to follow longer up and down trends over time.
Good examples of growth investments include things like stocks or ownership of property (we define the two below). These tend to have certain higher risk elements and do not pay dividends. Even so, historically they tend to go up in value when given enough time.
As the name suggests, defensive investments tend to minimize the risk factor and focus more on security and generate consistent income.
Common defensive investments include bonds and cash (again, we define the two below). They are more stable retirement investments that can generate profits, interest and dividends, but do not tend to grow in intrinsic value.
Some common investment options
At this point, we have reviewed the fundamentals of investing: security, income and capital growth. We have also divided most investment options into one of two categories: growth investments and defensive investments.
These are the building blocks you can use to make decisions and guide your investment strategy. However, these are only theoretical definitions.
When you are going to develop an investment strategy and actually put these concepts into practice, you will need to do so by committing to real investment options. Here are some of the most common available to most investors:
High Yield Savings Accounts
It’s a way to invest your money. Rather than using a checking account, you can put your money aside in a dedicated savings account or similar option where your money can earn a higher rate of return.
It’s a good way to keep your money generating some sort of income. However, it is generally low risk and, therefore, low reward.
Bonds are, essentially, when you lend money to another entity. In exchange, you receive your investment with interest in installments over a predetermined period of time.
Bonds can come from several places. For example, governments and corporations can issue and redeem bonds to those who buy them.
Stocks are shares of ownership in a company. They give businesses a way to raise funds, and in return, anyone with stock owns a piece of their business.
Two common forms of stocks include growth stocks, which have the potential to increase in value, and dividend stocks, which pay a steady stream of dividends.
Funds are organizations or entities that pool cash from multiple investors and then spread it across a variety of different stocks. This reduces risk while allowing investors to still hold a wide variety of stocks.
Dedicated companies manage mutual funds. Index funds follow the path of entire stock indices, such as the S&P 500. ETFs are exchange-traded funds that also tend to follow indices.
Buying properties is one of the oldest forms of investment in the history of civilization. By flipping a home, buying a rental property, or even just owning a home, you can harness the growth power of real estate ownership over the long term.
The only problem here is that the barrier to entry for real estate can be high. Fortunately, there are other related options, such as buying a REIT (real estate investment trust). This allows you to tap into the income stream of existing real estate assets.
If you want to directly own a property but are short on funds, you can also turn to symbolic real estate. Innovative companies like RedSwan CRE are fracturing commercial real estate ownership, allowing individual investors to access multi-million dollar investment opportunities – which are usually reserved for super wealthy investors – for as little as $1,000. With the recent scares in the financial and crypto sectors, RedSwan offers a more stable investment option in the crypto world.
Finally, there is the broad category of alternative investments. This includes all things outside of traditional investing.
For example, cryptocurrency is a good alternative investment when integrated into retirement in a neutral and diversified way (i.e. don’t just put all your money in coins) . Some NFT projects also have the potential to increase in value over time – although it is important to be very careful as most projects lose value.
Other alternative investment ideas include peer-to-peer lending, investing in collectibles, and even becoming an angel investor or starting your own business.
Questions to Ask When Choosing Investments
As you prepare to create a financial strategy and choose the best investments for yourself, here are some key questions to help you get started (and then stay) on the right path:
- Do you have a financial roadmap? This should do everything from considering your current expenses to assessing potential future needs and even planning for things like rebalancing your portfolio in the future.
- What are your financial goals? Clear and achievable goals are a necessity when developing your financial roadmap. These should complete your roadmap and help you identify what is “good enough” for your investment success.
- What is my risk tolerance? All investing involves risk, but how much risk are you willing to take? Remember that risk shouldn’t be the only factor. However, the higher your risk, the greater your profit can be.
- Do I have an emergency fund in place? Going hand in hand with the potential for risk, an emergency fund is ground zero for safe investing. If you plan to risk your hard-earned money by investing it for the long term, make sure you have a solid rainy-day fund ready to get you out of any short-term difficulties you encounter in the meantime.
- Can I regularly add to my investments? Saving in lump sums can sometimes be effective, but if you really want to prepare for retirement, you need to increase your savings on a regular basis. It also allows you to leverage the power of averaging, which spreads your risk.
Additional questions to ask:
- What are my unique circumstances? Are there things about your situation — such as starting a family or working as an entrepreneur with fluctuating income — that will impact how you prepare for retirement and investing, particular ?
- How old am I? Your age plays a major role in how you invest. For example, if you’re in your 20s, you should probably focus on higher-risk securities, like stocks. Once you’re in your 60s, however, the ratio of stocks and bonds should be closer to balance.
- Are my investments (or future investments) diversified? Diversification is an essential part of any investment portfolio. Just because you like a particular investment option doesn’t mean you should invest too much in it. Be sure to regularly assess the balance of your portfolio.
- Can you access professional help? Finally, is it possible to get help from a professional when planning? This may be a service provided by your employer or a third-party financial expert. Either way, it can help you maximize your investments sooner rather than later.
From understanding the basics of investing, asking the right questions, to understanding your options, there are many ways to make sure you’re choosing the right investments for your retirement. The important thing is that you take the time to prepare. Lay the groundwork now so you can make smart decisions early on as you prepare for a comfortable retirement that meets all of your financial needs.
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