Being financially secure when you go on your retirement is quite important. The following article could give you the key to that security, so if you are considering retiring soon, be sure to check out the useful tips from the Finance Genie to understand why diversification is important!
What Is Diversification?
Diversification is a term used to refer to diversifying your 401k investments. You may have heard the saying: “do not put all your eggs in one basket”; this is exactly what diversification is.
How Do I Use Diversification to My Benefit? Why Diversification Matters
If you want to get the most out of your 401k, it is best to diversify your investments. Don’t know how to do that? Check out some top tips from experienced investors below.
Firstly, do not invest all your retirement money in company stock. Even though company stock might be a safe choice at the time, it could backfire on you as well. You never know, your company could collapse and go bankrupt. Therefore, if you think of buying some stock, don’t buy them all from the company you work for. However, you can buy some.
Check Employer Contributions
Most investors are not aware that some employer contributions come with restrictions. For example, some employer contributions can only be used to invest in company stock.
If there are some limitations on employer contributions, there is still no need to panic! You may be restricted on what you can do with employer contributions, but you are not restricted on what you can do with your own contributions! So, be sure to invest your own contributions somewhere else.
Check Current Events
Watching the news could actually give you valuable news on stock values. For example, in 2007 and 2008, the automotive industry suffered greatly; this included several companies shutting down and firing their employees. Naturally, investors who watch the news, could sell their stock in those companies before it was too late.
Sometimes it is also necessary to think of some companies that may be linked to current news, and which could affect the value of your stock. For example, if automotive industries are struggling, car dealerships and wholesale auto part sellers may be suffering too. So, you may want to sell your stock in these businesses too.
Consider the Economy
While your stocks can go up and down in value over the years, it is important not to panic and sell too soon. The economy sometimes suffers, but eventually restores itself. So, if you have stock in a reliable company, it may be worth to buy low and sell high.
Get Some Bonds
Since stocks are quite risky when you are set to retire, it is usually a good idea to sell some of your stock and use the acquired funds to buy bonds instead. Even though bonds have a smaller yield, they are a lot safer than stocks. Of course, you could still keep some stock, but don’t solely rely on stocks alone when you are about to retire.
Related: What are bonds?