Generally speaking, the younger you are, the more risk you can take. That’s because you have more time to recover from a market downturn or loss of value in a particular investment. So, if you’re in your 20’s, you can allocate more of your portfolio to more aggressive investments (like growth-oriented and small-cap companies for example). If you’re nearing retirement, allocate more of your portfolio to less aggressive investments, like fixed-income, and large-cap value companies.
Generally speaking, stocks are more volatile than bonds, and bank accounts (checking and savings accounts) are not volatile. [2] X Research source Remember, there are always risk trade-off’s to be made. Often, when you take less risk, you make less. Investors are richly rewarded for taking significant risks, but they can also face steep losses. [3] X Research source
As a rule of thumb, you’re going to want a diversified portfolio no matter what your goal is (buying a house, saving for a child’s college education, etc. ). The idea is to let the investment grow over a long period of time so that you have enough to pay for the goal. If your goal is particularly aggressive, you should put more money in the investment periodically rather than opting for a more risky investment. That way, you’re more likely to achieve your goal rather than lose the money that you’ve invested.
If you’re interested in getting a great return on your investment quickly, and you are prepared to take the risk that you could also see a great loss just as quickly, then you’ll select more aggressive investments that have the potential for significant return. These include undervalued stocks, penny stocks, and land that might quickly appreciate in value. If you’re interested in building wealth slowly, you’ll select investments that generate a slower return on investment over time.
Stocks and mutual funds are very liquid and can be converted into cash, usually in a matter of days. Real estate is not very liquid. It usually takes weeks or months to convert a property to cash.
Set up a short-term emergency savings account with three to six months worth of living expenses. It’s important to have this established to protect yourself if something unexpected happens (job loss, injury or illness, etc. ). This money should easy to access in a hurry. Consider your options for long-term savings. If you are thinking about saving up for retirement, you may want to set up an IRA or 401(k). Your employer may offer a 401(k) plan in which they will match your contribution. If you want to start an education fund, think about 529 plans and Education Savings Accounts (ESAs). Earnings from these accounts are free from federal income tax as long as they’re used to pay for qualified education expenses. [7] X Research source
If you have money in risky investments, it’s a good idea to sell them and move the money to more stable investments when you get older. If your finances tolerate the volatility of your portfolio very well, you might want to take on even more risk so that you can reach your goals sooner.
