Congratulations! The fact that you now have a sizable saving means that your finances are in good shape (you do have a sizable savings, right?). This, in itself, is truly a remarkable achievement. One that required a lot of effort and resolve, as people tend to struggle to be in this position in the first place.
But What’s Next?
Now comes the tricky part. Up till now, you have been dealing with the familiar. But now, you have to deal with the unknown and put your money to work. This can be quite intimidating for some and as a result, many people just end up procrastinating and doing nothing at all.
Well, you really can’t blame them. It takes a lot of effort to save money. And of course, any decision concerning your savings should take a lot of consideration. No one wants to throw their hard-earned money away, do they?
Therefore, the very first thing to know is that we can’t just apply the old ideas blindly. They simply do not work in today’s world, as the global landscape is changing rapidly and it is a daily struggle to keep up.
You Have To Be Smart With Your Money
For example, take the popular saying: the higher the risk, the higher the return.
Nobody tells you the second part of that equation – The higher the risk, the higher the loss! And tell me, how is that any different from gambling, where you are supposed to take a blind bet and the higher amount you bet, the more money you can win as a result? This is just wishful thinking. Like shooting an arrow blindly and hoping that it hits the target. It just doesn’t usually work out this way. You have to be smart with your money.
Therefore, the fundamental question that needs to be answered, first and foremost, is the approach you will take towards investing your money. Do you go for the home run or do you stand back and keep it safe?
The magic words here are Diversification and Asset Allocation.
Diversification and Asset Allocation
Let’s start with diversification. You just can’t put all your eggs in one basket. This has been said over and over again, and can’t be stressed enough. But still, it is surprising how often people tend to ignore this advice and end up taking blind bets on hearsay.
But you don’t diversify just for the sake of diversifying. You have to diversify your investments and take a calculated risk with your asset allocation.
I know, asset allocation just sounds like a fancy word, but in fact, it is quite a fundamental principle. Basically, it is the percentage of money that you spread out (allocate) to different investment classes.
Evaluate Your Requirements
This requires you to evaluate your situation, and then invest your money accordingly. For example:
- What percentage can you invest in risky investments without financially hurting yourself substantially, should they fail?
- How much will you keep as a buffer for unforeseen events or emergency needs?
- What are your requirements from your savings – do you need to take out money to fund your child’s college education in four years time? Or are you just simply saving for retirement after twenty years?
Answering the above questions will help you formulate a diversification plan specific to your needs .For example, you might determine that you can keep 30% of your money in a savings account, 50% in government bonds, and invest the remaining 20% in stocks.
There is no one-size-fits-all solution and the options are numerous, with varying degrees of risk and returns. But the bottom line is that your portfolio of investments should be strictly tailored to your personal requirements. This will enable you to optimize the returns on your savings, taking care of your specific needs, and ensuring that your money is not put blindly in harm’s way.