your preference for risk, how far off in the future your goals are, and finally, your expectations. You might want to review Parts I and II of our Lifetime Investment Guide if you need to bone up on setting goals starting to invest.
We’ve already discussed how much of your salary you should be salting away in Parts I and II of this guide. It bears repeating, however. Whether you’re beefing up your retirement portfolio or trying to get enough together for your kid’s college tuition, financial planning experts say a good rule of thumb is to set aside a minimum of 10% of your gross salary. And, it’s a good idea to aim higher than that if possible — say 25% — if you can afford it. We’ve also stated that it’s best to have three to six months’ salary set aside in a money market mutual fund, as a safety net. You’ll be able to tap into that savings by check and at the same time earn 5% interest, far beyond what you’d receive in a regular savings or checking account.
For someone like Pamela Norris Norwood, 45, even 10% can be difficult, some months. Norwood, who runs a consulting business that trains security guards and law enforcement personnel in Columbia, Maryland, earns about $70,000 a year. Norwood often finds that her pay seldom comes in steadily. “Being in my own business, my income fluctuates drastically, so when I have a large contract, I speak with my financial planner to help me to allocate it for my retirement as well as for the lean times,” she says.
Norwood, who’s divorced, can step up her program, now that her son Marc, 19, is supporting himself as a chef. To that end. she is taking 10% of the gross she gets from Norwood Security Consultants and putting 50% of that sum into mutual funds. The other half of her savings goes into a mixture of Treasury bonds, stocks and her 401 (k).
If you stick to a well-constructed plan of saving and investing from your 20s or even your 30s onward, you’ll find in a matter of a few years, you’ve got a burgeoning portfolio of a few mutual funds (that is, if you’ve been following BE’s Lifetime Investment series so far). Now what?
Our next suggestion is to add a touch of sophistication to your mix of funds by adding different types of investments to your portfolio like bonds and individual stocks. It’s also time to start breaking your holdings up into set amount in each asset class — stocks, bonds and cash. Investment professionals call this asset allocation, but it really boils down to three simple rules: stocks are to grow wealth and increase what you have; bonds cushion your portfolio when the stock market acts like a roller coaster ride; and cash helps you through a possible rough patch.
Spreading your wealth not only brings diversification to your portfolio, it helps insulate it from cruel turns of fate like periods when the stock market goes