With the stock market plummeting for much of 2022, investors are rediscovering the risk of investing. The sad truth is that your money is still risk of sustaining some kind of loss whether or not invested. Therefore, it is extremely important to put some of your money to work in different ways in order to create an end-to-end portfolio that works best for you. You can’t completely eliminate risk, but you can manage it in ways that improve your overall chances of success.
If you want to make your overall portfolio more resilient, you need to put some sort of risk management at the center of your plan. Individually, the investments mentioned below may not seem like much, but together these three choices bring your overall portfolio that much closer to being unstoppable, even in this market.
No. 1: Cash
It might seem strange to think of silver as unstoppable, especially in a time of ever-increasing inflation. Despite this challenge, cash has a key advantage over other asset classes: it’s what you use to pay your bills. In addition to that, it is the yardstick against which other assets are measured. Therefore, as terrible as the performance of cash versus inflation is this year, it has far beaten investing in the stock market.
Of course, if silver beats stocks over the long term, we all have much bigger concerns. Therefore, although it is important to have some cash, it is also important not to overdo it. A good guideline is to have enough money to pay your bills, plus about three to six months of expenses in an emergency fund in case you face one of those unfortunate “life happens” moments. “.
Much more than that, and you risk having too much of your money overexposed to inflation. Much less, and you are more likely to be forced to sell your shares while they are falling to cover an unexpected expense.
No. 2: High quality bonds
If you have bills that you expect to pay from your wallet in the next five years or so, stocks can be an incredibly dangerous place to put that money. After all, if the market goes down (like in 2022) and you depend on selling your shares to cover your bills, then you’ll be forced to liquidate that many more shares to cover your costs.
For the money you’ll need in the short term, bonds have some key advantages over stocks. First, typical bonds have predictable payments – regular interest payments on published dates, followed by repayment of principal at maturity. This makes bonds much more suitable than stocks for duration matching – turning an investment into cash just before you need it.
In addition, bond payments have priority over stocks. If a company fails to make a scheduled bond payment, it usually leads to bankruptcy – and potentially the company’s assets are returned to those bondholders. Consequently, if a company box make its obligation payments, it is likely that it will be make its bond payments.
Yet a company’s ability to make its obligation payments depends on both the strength of its balance sheet and its ability to generate cash. So keep an eye out for these and stick with companies that seem capable of continuing to make these payments to improve your chances of your bond investments being truly unstoppable.
Of course, the main disadvantage of bonds is that with generally fixed cash flows and a known lifespan, their total returns are also generally limited. So while they can often provide better returns than cash for these short-term needs, bonds are often not great tools for building long-term wealth.
No. 3: Diversified equity index funds
Despite the challenges we see in 2022, there is good reason to believe that stocks will continue to be an excellent vehicle for building long-term wealth. When it comes to investing in stocks, over time low-cost diversified equity index funds tend to outperform actively managed mutual funds. This makes broad-based equity index funds an incredibly powerful investment choice for long-term money.
Nevertheless, as 2022 reminds us, the stock market can go down as well as up. That’s why stocks – unstoppable as they are in the long term – are not where you want to keep the cash you need to spend in the short term.
Collect them all for a much stronger portfolio
On their own, cash, bonds, and stocks come with trade-offs and risks that mean they’re not really suited to be the only investment vehicle you use. Put them together with an eye toward when you need the money you save, however, and they each become building blocks of a much more unstoppable portfolio.
If you’re ready to put the pieces together on your own, there’s no better time than the present to get started. Make it a priority today and accelerate the date that your end-to-end portfolio will have a better chance of meeting your needs when you need them.