If you’re serious about funding your retirement, most experts will tell you diversifying your investments is the way to go. Spreading your wealth between various savings products and markets can be a bit arduous, and keeping track of your money once you have invested gets harder as you add individual pieces to your ever-growing financial puzzle.
One easy solution could be putting some of your savings into index funds. If you use them correctly, index funds can diversify your holdings without complicating your portfolio much on the surface.
Index Funds Give ‘Total’ Coverage
One of the safest ways to get into index funds is to invest in a total stock market index fund. Total stock market index funds are very diverse investment packages: In one portfolio, you get a taste of all the pieces that make up the U.S. stock market. You get small, medium and large stocks from all sectors of the market, along with stocks with varying growth potential and risk-reward ratios.
The makeup of total stock market index funds depends on the decisions and trends of the market as a whole, meaning your holdings will align with many other investors’ and you won’t have to expend any extra effort. If large-company stocks are the most popular market-wide purchases, your portfolio will contain more of those shares. This is a very conservative but safe way to save for your future. You can purchase these funds through a stock broker (who may charge commission) or through a company such as Fidelity or Charles Schwab (which may be commission-free).
Diversifying your portfolio is appealing for one main reason: If something happens to one sector or product, your entire holdings won’t disappear if you have diversified properly. Spreading your money to different areas of the market, investing in more than one commodity or holding your funds in several varieties of accounts are all good examples of diversification.
Taking the effort to make sure your money isn’t too concentrated in one sector won’t guarantee you funds enough for a comfortable retirement, but it could go a long way to helping you out.