There are many elements to a successful investment strategy, but they usually boil down to one basic concept—asset allocation. When you spread your retirement savings out among a variety of investment vehicles, you greatly increase your money’s earning power, at a level of risk that sits within your comfort zone.
Stocks, bonds, and cash are the most common asset classes, and each has its own rewards and risks. They often move independently (when one drops in value, another usually rises) which helps to maintain equilibrium and a reasonable level of risk.
Read on as we dive deeper into each type of retirement savings allocation and how best to combine them into an ideal investment portfolio that meets your needs.
Simply put, a stock is a share of an organization that needs your cash in order to do business. You then own a piece of the company and, depending on how many shares you’ve bought, have a say in how they operate.
Stocks offer the highest rate of return of the major asset classes, but also the highest level of short-term risk. Some large company stocks post a loss an average of one of every three years, which can seem daunting at first glance. However, conventional wisdom suggests that if you stick it out, you’re more likely than not to grow your investment over time.
The two major types of stock are common and preferred. Common, not surprisingly, is the more popular of the two. You are entitled to dividends (a portion of the company’s earnings) and voting rights. Preferred is a little less volatile and usually provides a guaranteed fixed dividend for life (but with no voting rights).
Bonds are typically less risky short-term investments, but provide less growth over time. Rather than purchasing a part of the company, a bond is a loan you provide to a company or government department. Much like a bank, the company or agency will eventually pay you back the principal with interest. Or, you can sell the bond yourself.
Bonds come in three basic forms—short term (less than five years), intermediate term (5-10 years), and long term (more than 10 years). The level of potential reward (and risk) goes up as you move toward long term. If you need your investment back in three years, stay in short term, but if you’re willing to ride the waves for higher returns, consider long term.
Like all investment options, cash has its pluses and minuses. On the plus side, it’s very safe. Most cash vehicles—savings deposits, money market funds, certificates of deposit (CDs), and treasury bills—are backed by a U.S. government guarantee. On the downside, cash has the smallest return of any of these asset options. You also run the risk of inflation, which may go up even when your rate of return doesn’t.
So where should you stash your retirement money? Which option is best? That largely depends on what your financial needs are now, and what you anticipate they’ll be 10, 20, or 50 years down the road. It also hinges on your tolerance for risk.
If you’re squarely focused on a comfortable retirement that’s a few decades away, then stocks are your friend. If you have more immediate needs, like replacing that broken-down Ford sedan with a sweet new Prius, then lean more conservatively and work with a mix of cash, CDs, and short-term bonds.
No two investors are alike, and neither are their portfolios. Everyone has their own Goldilocks sweet spot that fits their budget and life goals.
A balanced diet has a healthy mix of proteins, carbs, ruffage, and fats to keep you in top shape. Likewise, your retirement savings need to be allocated across a balanced portfolio that simultaneously protects and grows your assets.
USALLIANCE has a wide range of products that can help you achieve that balanced diet. These include:
Learn more about these and other USALLIANCE investment opportunities here.