Investment Options as Part of Your Retirement Strategy
This post is featured on behalf of Jenna Brown.
Retirement might just be the very last thing you want to think about when you are in your 20s. That being said, you really should start investing for retirement when you start earning money!
The reason for this is a little thing known as compound interest. Compounding is what happens when you earn interest and then that interest earns even more interest.
When you start investing early, the actual effects of this compounding can be massive. Here, I’ll go over a few different options, how they work, and the level of risk involved.
So, what should you invest in? There are many options here. Basically, they can be broken up into three different types – bonds, stocks, and cash. Aside from that, people also choose to invest in what are known as hard assets, which include things like gold and real estate.
Why You Need to Mix It Up
Now, cryptocurrencies might be a good thing to invest in, but you should never put all of your eggs in one basket. Even if you do start investing in your 20s and have 40 years to save for retirement, you should hedge your bets and diversify your portfolio.
The thing is, getting rich overnight with a single investment rarely happens (read: don’t count on it). This means that you have to be strategic when it comes to investing for retirement.
You’ll need to have a mix of cash, bonds, and stocks based on a variety of factors. This is known as asset allocation and if you choose this allocation correctly, they will work in your favor.
When it comes to investment choices, there are plenty of them. What you really need to do is find investments that offer a high return for a lower risk. This constitutes a classic financial puzzle – balancing returns with risks.
The thing is, at the heart of all investments, there is some measure of risk. The higher the risk usually means that the returns will be higher too. Anytime you are going to invest in anything, you need to do your research and determine if the returns are high enough for you to risk your money on it.
1. CDs (Certificate of Deposit)
A CD is a low-risk investment, and is something that you can get from an investment broker, credit union or bank.
It basically means that you are depositing your cash for an amount of time that is specified to the financial institution. The financial institution will in turn, set a rate of interest for that period and the interest rate will not change, regardless of what happens to any other interest rates.
You will be locked in for the set period of time. However, if you need to withdraw it before that period of time is up, you will typically have to forfeit a penalty that equals about three months of interest.
Professional investors who are knowledgeable can and, quite often, do make money with a fair amount of regularity on common stocks.
However, the average investor (AKA someone without professional knowledge in the field) will not be equipped with the knowledge necessary to speculate on the stocks that will perform well and which will tank.
If the typical investor sunk their money into a common stock and left it alone for a decade, without touching it at all, it might keep pace with inflation and maybe even show a gain of a couple of percentage points.
The thing is, your typical investor won’t do that. They might try to move that investment around from stock to stock trying to reap the maximum amount of benefits. Not being professionals though, their knowledge will be limited and they can end up losing money like this as opposed to making it. In this case, it’s best to work with a professional.
If you want to be successful in your investing, the best thing you can do is to do ample research on your options. Diversification in your investment strategy will benefit you, too. Spreading out your investments is less risky in itself because it will mitigate any losses you might experience.
Remember, investing is a long-term strategy so don’t stress too much over small decreases!
P.S. Considering retiring early? Here’s what you need to know about the F.I.R.E Movement in your 20s.