You have probably heard many times over that no matter how much or how little you have invested for your retirement, you need to think about diversifying your portfolio. We often think that diversifying is a strategy to increase our wealth. However, as financial advisors like Keith Springer can explain, a diversified portfolio is an important strategy to protect your wealth rather than to grow it. This is because a diverse portfolio with assets across multiple sectors, markets and assets types will ideally make it possible for you to balance losses in one part of your portfolio with gains in the other.
One way to balance a portfolio while still earning is to diversify so that you have some high-risk/high-earning assets that can be “grounded” by more conservative assets that have relatively low earnings but are also relatively low-risk.
Here are some of the safest options out there to think about when you are diversifying:
Bank Accounts – because bank accounts are some common and are generally used to manage money flows rather than to accumulate money, they can easily be overlooked as an investment vehicle. Most banks have a range of different kind of accounts that offer different rates of return. The higher rates of return will be from savings accounts, especially those that require minimum balances. These rates are typically very low, and may not even keep up with inflation – be sure that you pay attention to the rate of inflation or you may end up losing money in the long run. However, the advantage of bank accounts is that your money is protected up to certain levels.
Money Market Funds – money market funds are not risk free, but they offer relatively safe harbors for your money in volatile times. Money market funds are a type of mutual fund that only invests in short-term safe assets like those discussed in this article. You can buy and sell them at any time, and they are considered to be quite safe. They have variable rates of return, so it is difficult to predict earnings.
Certificates of Deposit (CDs) – Certificates of deposits represent loans that you make to the bank for a fixed period of time. In exchange, the bank pays you a return. The rate of return is higher the longer you agree to lock in your funds. A common strategy to maximize returns on CDs is to create a “ladder” of both short and long-term CDs which you can renew as they mature. By starting off this way, you will eventually have all of your money invested in the longest term CD possible, but will also have some CDs renewing every year if you decide that you want to cash them out.
It is true that none of these investment options is likely to grow your money significantly. However, if your portfolio contains a mix of bank accounts, money market funds and certificates of deposits, this will go a long way towards providing a bit of a cushion against losses that you may experience in riskier investments.