How to Start Diversifying Your Investment Portfolio
Somehow, everyone hears at some point about “diversifying a portfolio”. Often, people who don’t know much about finances will use this term to make it sound like they do. However, this is actually a very important financial and investment strategy. The idea behind diversifying your portfolio is simply just putting your eggs in more baskets. That way, if you lose some, you lose all. A lot of people put all their money in their homes, and then when the housing market crashed, they were in dire straits because they didn’t have money in anything else. Industry experts point this as a major reason why the wealth gap exploded around that time – the wealthier Americans had their money in a wider variety of things, while middle-class and working-class Americans had their money in their homes if they had their money in anything at all. So let’s talk about how you can take some simple steps to diversify your portfolio.
Start with Your House
Your house is a great place to start. If you’re currently renting instead of owning, your first step really should be to purchase a residence. Why? Well, what’s the point of investing money at all? To increase wealth. Why bother increasing your wealth? To ensure your ability to maintain and improve your family’s quality of life all the way until you die. The most basic component of quality of life beyond food and water is shelter. So shelter should be your highest priority. Also, every month you pay rent, you’re essentially just flushing that money down the toilet. It’s gone; you never see it again. When you buy a home, especially if you get the right mortgage option, the only money you throw away is the money you pay in interest, taxes, and insurance. All money that goes to principal is just taking eggs from one basket and putting them in another. The real estate market also consistently rises over time, despite occasional dips or crashes, which makes it a fairly safe long-term investment.
Take Care of Retirement – When You Won’t Be Able to Work for a Living
Your next priority should be looking to the future. As hard as it may be to imagine right now, there will come a time when your health, mobility, or other factors will make it impossible for you to continue working. Even if you’re the model of health all the way until your death, you don’t want to have to work beyond retirement age because let’s face it: who wants to spend their entire life working? You should look into a 401k, an IRA, or even overstuffing a life insurance policy. Most employers offer a match, usually around 3%, on a 401k. In other words, you can contribute a certain percentage of your paycheck to your 401k, and the employer will match your contribution up to 3% of your paycheck. If you have this option, you should do this because you’re literally doubling your contribution immediately, and the 401k will grow in value over time because it’s an investment vehicle. An IRA is like a 401k but without the employer contribution. An alternative to an IRA is a life insurance policy that you can overstuff. Speak with a life insurance agent to learn more about that option. Securing your retirement is a great second step after buying a house, because then you can work backwards.
Investing in Stock or Other Risky Investments
Once you’ve started putting money in your home, and you’ve opened a 401k, IRA, or life insurance policy and are contributing to that, the next step to diversify your portfolio can be to go out on your own and see what investments opportunities are available to you. What you should do first, however, is determine how much money you would need access to in order to maintain your current quality of life for the rest of your life without any other income. The closer you get to that amount, the closer you are to being able to retire. When those numbers match, you could retire right then and there if you wanted.
You can take some courses about trading stock and go directly into trading on the stock market if you want, but what can be a much more interesting and profitable (though it is riskier) venture is to become a partner in a small business. There are lots of start-ups that are looking for funding and are willing to trade partial ownership in the company for it. You may not be able to muster all the money they need, but you can still contribute and receive a share in the company for it. Before you do this, though, you should learn a little bit about how that usually works so you don’t get scammed out of the amount of ownership you’re entitled to. For the most part, the amount of ownership should be proportional to the amount you are contributing. For example, if you are contributing $10k, and they are offering you 10% ownership for it, that means they should have at least a $90k valuation before they take your money. If they only have $40k, then you should be receiving 20% ownership for $10k.