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Financial Planning: The Importance of Building a Diverse Investment Portfolio

Personal_Finance / Pensions & Retirement Sep 08, 2017 - 04:35 AM GMT

By: Boris_Dzhingarov


“Planning is bringing the future into the present so that you can do something about it now.” - Alan Lakein

It is vital not to underestimate the importance of planning for your retirement as well as your future. Simply stated, even in countries where there the state offers what used to be adequate pensions, the cost of living has risen to the extent that it is tough to make ends meet solely on a state pension.

Sarah Boseley of the reports that, according to the World Health Organisation, "life expectancy across the globe has increased by five years since 2000, the fastest rise in lifespans since the 1960s." Therefore, if you consider that the average first-world citizen will work for about 45 years of his life, he will have about 30 years of retirement which he will have to self-fund.

Personal retirement goals and expectations

If we take the above figures as the benchmark, you have to save enough to live off for at least 30 years after you have finished working. Additionally, when planning your retirement savings, you need to also consider how you wish to spend your retirement years.

Would you like to travel, take up hobbies, as well as spend time with family and friends, or will you be content with staying at home living on a very monthly income? The answer to this question will determine how much money you need to allocate to building your personal retirement fund.

Financial planning

Not only is financial planning an important part of saving for your retirement, but it is also a continuous process to assist you to make prudent decisions about money that can help you accomplish your aims in life. The results of sound and wise financial decisions are threefold:

  • It will decrease your stress levels and allow you to relax about your family's financial future.
  • You will have control and peace of mind through knowing that your future is in the process of being secured financially.
  • Finally, your confidence will be greater because you are on track to meet your financial planning goals.

Sound financial planning includes making sure that you understand the role that the current geopolitical crises play in determining the levels of investment risks and that you take action accordingly. Even though an investment rule seems to be, the higher the risk, the greater the reward, there comes the point where the risk of losing your investment is not worth the risk.

Building a diverse investment portfolio

A senior financial analyst from Weiss Finance  stresses the importance of using diversification to mitigate or limit your exposure to risk. He explains that "one of the answers to the question of how to balance risk versus reward when growing your investment portfolio is to invest in a number of diverse assets. Ergo, diversification will help you mitigate the risk and potential for volatility in your portfolio."

The most significant role and the principal goal of diversification are not to increase the returns on your investments; their primary purpose is to reduce the impact of the current global financial market instability on your portfolio.

The composition of a balanced portfolio

Based on the information mentioned above, let’s have a look at the structure of a well-balanced portfolio. Simply stated, it should comprise of four different types of assets:

Short-term investments
A good example of short-term investing is day-trading. In essence, day trading is when you open and close a trading position within the same day. It is interesting to note that short-term trading provides much of the global financial markets’ liquidity. It is a sound investment strategy to employ during volatile or unstable market conditions.

Domestic or international stocks
Local and offshore stocks can and will often be the most dynamic part of your portfolio. Ergo, they often provide the highest percentage of growth; however, they can also be the riskiest.

Real estate  
Real estate investments typically provide long-term stability and growth; therefore, they should comprise a substantial part of your investment portfolio. You have two choices in this regard: you can invest directly in property, or you can invest in real estate companies listed in any one of the global financial markets.

Bonds are an excellent way of preserving investment capital and earning a predictable return. They are considered a stable investment which can be used to offset the higher risk investments. They typically pay out interest or bond dividends twice a year for the duration of the bond's life. Furthermore, once the bond has matured, the entire principal or capital amount is repaid to the investor.

Final words

As mentioned above several times, the importance of making sound financial decisions and diversifying your investment portfolio cannot be stressed enough. No one wants to be left stranded when they are of retirement age and have to depend on a government pension for up to thirty years or more.

By Boris Dzhingarov

© 2017 Copyright Boris Dzhingarov - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2018 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

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