I covered the main ways of diagnosing your financial health in this past post. I’ve been using Wednesdays to go further in depth on each point since I truly believe that financial health leads to less stress and happier lives.
I have already covered the first four points – Spend Less Than You Earn, start an Emergency Fund, review Retirement Savings, and Debt. The fifth point was to diversify your investments. This means making a list of your investments and the amount invested in each one.
Type of Accounts
First, I’d highly suggest investing in different types of accounts. For example, compound interest in a 401k is taxable when you start making your retirement withdrawals since you contribute pre-tax income. The compound interest of a Roth IRA is not taxable since you contribute post-tax money. By investing in taxable and non-taxable accounts for retirement, you can balance your withdrawals to stay in the lowest tax bracket possible in your later years. We invest in a 401k and a Roth IRA (hopefully two soon) in order to cover our retirement years along with my husband’s pension. We also make investments in individual stocks in a Scottrade account to cover the years between our target retirement age of 52 and our “normal retirement age”. By diversifying accounts, I hope we have our retirement bases covered.
Type of Investments
The second really important part of diversification is to make sure that you aren’t too heavily invested in any one company. CNN Money and countless blogs suggest never investing more than 10% in any one company/stock. I agree with never putting all your eggs in one basket, so this seems like fantastic advice. Honestly, do you want your retirement on the line if a company doesn’t do as well as expected or crashes completely?
We are invested in about 15 different individual stocks in our Scottrade account right now. We are currently breaking the 10% rule for Johnson and Johnson and Pepsi since their prices had crashed low enough to really gorge, but a combination of investing more elsewhere and selling some for profit will rectify this situation within the next year.
The 401k and Roth IRA are in separate target date mutual funds that are spread out through a ton of domestic and foreign stocks and a few bonds. We’re in our mid-late 20’s, so our retirement accounts are heavily invested in equities. As we near retirement, our investments will be moved to less risky categories since we want our money to be safely waiting for us down the road. By diversifying in as many categories as possible, all of your money as a whole will be safer in general.
Are you safely diversified? Or are you in a similar Pepsi or J&J-loving position as us?