Every individual needs to be thinking about their retirement. While there may be social security benefits in your future, it’s far more beneficial to build a retirement portfolio of your own. If you start early, you’ll have the ability to generate a significant amount of wealth over time, and if you manage that portfolio properly, you should be able to make reasonable withdrawals to cover your expenses without ever tapping into your principal.
However, this approach demands that you keep your portfolio balanced, with many different types of assets that compensate for each other’s strengths and weaknesses. But which types of assets are most important to consider?
The Most Important Assets to Consider
These are some of the most common—and most important—assets to include in your retirement portfolio:
1. Stocks. Stocks represent shares of ownership in a publicly traded company. Each share of stock has a price attached to it, which changes frequently in response to news about the company’s performance (and future). Generally, stock prices for successful companies move consistently upward, allowing you to capitalize on the gains. Some company stocks also issue dividends, or shares of profit, regularly, allowing you to develop a stream of passive income. That said, stocks are somewhat risky, since there’s never a guarantee that a stock’s price will move upward—or that a company will be around in the future.
2. Bonds. Bonds are often considered a complement to stocks. They function almost like a loan; you’ll lend a fixed amount of money to a company or organization, earning a set interest rate on an annual basis. Many classes and types of bonds exist, but generally, they come with a lower interest rate than you could typically make on stocks and much more consistent performance. They’re lower-risk, yet lower-reward.
3. Real estate. It may also be a good idea to invest in real estate. There are many options here, including purchasing land for long-term development and growth, or purchasing rental properties to collect a small profit each month. Real estate is tangible, making it a somewhat more secure investment, and it offers an impressive rate of return if you know how to manage it properly. One of the secrets to success is finding the right deals. If you get your real estate license online, you may be able to find much better deals than the average person, giving you a critical advantage.
4. ETFs. Exchange traded funds (ETFs) and mutual funds have many similarities. Both allow you to invest in a collection of assets all at once; for example, instead of owning shares of stock in a single company, you could purchase an ETF that tracks the performance of many stocks at once, such as stocks within a specific industry. The advantage is that you can limit the risk of being exposed to only one company, while still getting the benefits of the asset overall. ETFs aren’t directly managed (at least not to the extent of mutual funds), so they tend to be less expensive; both ETFs and mutual funds may charge you fees based on performance.
5. Precious metals. Depending on your goals, you may also wish to get exposure to precious metals or similar commodities. These assets tend to have value, but may or may not be volatile, depending on market conditions. Metals like gold and silver tend to increase in price when the stock market is performing poorly, so they serve as good complementary assets.
6. Tangible assets. In some cases, you may also want to hold miscellaneous tangible assets. Vehicles and similar assets depreciate over time, so they aren’t necessarily good investments. However, if you have a rare collection or a few pieces of important artwork, these tangible elements could operate as part of your portfolio.
7. Cash. Stocks, bonds, ETFs, and real estate are all valuable investments that can increase your worth over time, but they vary in terms of liquidity; in other words, it might be difficult to get money when you need it, like if you have an emergency need. Accordingly, it’s a good idea to keep at least some of your portfolio in cash at all times. The amount will vary depending on your income, age, and needs.
Rebalancing Your Portfolio Over Time
There isn’t a single portfolio composition that works well for everybody, nor will the same composition work perfectly for you as you get older. One of the secrets to a well-managed long-term portfolio is gradually reducing you risk profile in favor of more predictable, safer returns. At least once a year, determine your current risk tolerance and study your current balance of assets, then make adjustments to get you closer to your long-term goals.
