Balancing Asset Allocation
Though many Americans believe they don't have to worry about funding their retirement until later in life, saving early will not only ensure a fulfilling lifestyle in old age, but also can also give you the time to grow your funds through investments.
It can be nerve-wracking for the inexperienced to start investing. After all, investing is never a sure thing, and it's not guaranteed that your money will grow.
However, by diversifying your portfolio, and balancing asset allocation, you can minimize the volatility of your investments, and minimize uncertainty.
To begin, let's discuss the different investments you can make, and what type of risk each represents.
Investments to Choose From
Stocks, aka equities, are essentially partial ownership of a public corporation. If you invest in a stock, and the corporation does well, its value increases and you share the growth. However, if the corporation goes bankrupt or starts moving in a downward spiral, you can lose everything you originally invested.
Bonds are loans that you give to the government or a corporation. When buying a bond, you are giving your money as a loan, which is kept for a set period of time. In exchange, your money will be returned to you and also includes earned interest.
A mutual fund is created when investors pool their money in an investment vehicle, which is operated by professional money managers. These managers invest the fund's capital using strategies to produce gains and income for the investors.
Mutual funds are attractive because they give small investors the opportunity to partake in professionally managed, diversified portfolios. Without this investing vehicle, an investor wouldn't be able to do much. (Typically the word "fund" refers to mutual fund, whereas the word "capital" refers to cash funds.)
An index fund is a type of mutual fund, in which its portfolio is constructed to track the components of a market index. For example, the Standards & Poor's 500 Index, which is the 500 largest publicly traded companies in the U.S., according to market cap (the total dollar market value of a company's shares).
An exchange-traded fund is a security that follows an index, a commodity, or a basket of assets (such as an index fund), but trades like a stock. ETFs experience price fluctuations throughout the day, and can be bought and sold at any time.
Now that we've gone through key terms, let's discuss why balancing asset allocation is so important.