If you have a high paying job, max out your IRA, and save a large percentage of your take home pay each month, you should be able to retire on track. But what happens if you decide you want to retire a few years earlier? Can you increase the risk factor in your portfolio to help your investments grow faster? After all, high risk could mean high rewards, right?
There is some truth to that statement. But when it comes to your retirement investments you should aim for solid returns, not try to buy the next big thing. Retirement investments are there for one reason: to provide you with a large enough nest egg to live comfortably throughout your retirement years. You don’t want to have to worry about whether you can make your mortgage payment or where your next meal will come from. Retirement investments are not for gambling. Here’s how to figure out the ideal amount of risk for your retirement investments.
Keep retirement investments simple. If you can't clearly explain to your mother how an investment works, then you probably don't understand it well enough to invest money in it that you will need for retirement. Try to keep your retirement investments simple.
If you don't understand it, don't invest in it. It's wonderful if you understand derivatives trading, foreign currency exchange, options trading, and other high risk or technically advanced investment opportunities. But while the average investor may have heard of these investments, he or she probably doesn’t know the nuts and bolts of how they function. If you don't understand the investment inside and out, don't buy it.
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Don't gamble with your retirement investments. Day trading, junk bonds, Forex, trading on margin, leveraged investments, penny stocks, commodities, and other high risk investments can be extremely profitable. But they can also break you overnight. The average person doesn't have the time, money, or investing savvy to be consistently successful with these types of investments. These forms of investments are akin to gambling for most average investors and should be left to professionals.
Open a mad money account. If you feel the need to participate in high risk investments, open an online brokerage account and create a specific mad money account, which you can use for any type of investment you wish. The key is to mitigate risk by limiting the amount of money you allocate to this account. Most experts recommend limiting your mad money account to 1 to 10 percent of your total portfolio, depending on the size of your portfolio and your risk tolerance. Limiting how much you invest in this account gives you the opportunity to get your investment fix, but prevents potential losses from crippling your retirement dreams.
Figure out your risk tolerance. Ideally, you want to keep your retirement investing as stable as possible. That usually means creating a portfolio with a balanced mix of stocks, bonds, mutual funds, and other investments. A well diversified portfolio can help you weather economic downturns and potentially keep your retirement plan on track. If you aren't sure how much risk is too much, meet with a professional financial planner at least once a year to help you ensure your plan is appropriate for your investing needs.