Planning for you financial future is probably the most important thing for you and your family. Financial planning is basically a long term plan. If you think about it, you will be working for about 30-40 years so it is imperative to develop a strategic plan ahead of time in order to save money and invest in the future. College investment plans and 529 programs are good to think about if you have children. Diversification is probably the most important strategy to financial planning. Diversification of assets means not “putting all your eggs in one basket”. This lowers your risk profile and makes your investment strategy potentially more successful. Remember, there is no sure thing in investing and financial planning, but diversification can help you achieve your goals.
It is best to diversify into at least four different asset groups. Asset groups are stocks, bonds, real estate and precious metals. Let’s first look at stocks. There are many different types of stocks. Retirement planning means you want something with low risk and income. You would not want a high risk biotech stock that had no dividend for example. What you are looking for is a “blue chip” type stock. A blue chip stock is something like Coca Cola or General Electric. These type of stocks are low risk and usually have a steady dividend which provides a stream of income
Bonds are the next asset class to consider. There are many types of bonds with different risk levels. For example, a US Treasury bond would be considered the least risky type and a Junk bond the most risky type. Municipal bonds are considered less risky as are corporate bonds. As with stocks, the more risk will provide a larger interest rate. For example, Greek junk bonds may pay 10% per year and a US Treasury bond may pay 2% per year. Prudent planning means avoiding Junk bonds and focusing on the Corporate, Municipal and Government bonds.
Real estate investments can be land, productive farm land, rental homes, the family home or commercial property. Owning ones own home is a way to create income by not paying rent , especially in todays low interest rate environment. Farm land can produce income but does carry more risk. Raw land can be a good performing asset over time but you are subject to property taxes and it is illiquid. Precious metal are Gold, Silver and Platinum for example. Precious metals are basically insurance of you portfolio. They protect against currency debasement and catastrophe. It is important not to buy the paper derivatives of precious metals such as ETF’s (GLD), as more than likely they are paper frauds. Good luck and remember that 25% in each asset class is diversification.
