Saving for your future is so important that the federal government established Social Security after the Great Depression to give the American worker a way to save money for survival. A stock portfolio provides funds for your future in addition to your Social Security. You can use money to make money with a stock portfolio, but one or two stocks won't create stability or security. You need more.
More Than Social Security
Employers are cutting pensions and benefits and employees aren’t working 45 years for the same employer in the 21st century. Many retiring employees find that they have little more than Social Security benefits for retirement years. The Social Security Administration estimates that benefits cover about 50 percent of your needs at retirement, or 40 percent of your wages before retirement. The Social Security Administration also assumes that you’ll only need 80 percent of your preretirement earnings for retirement years. You can make up the other 50 percent of your needed retirement income with a stock portfolio.
A stock portfolio provides the potential for income on your investments. You have no guarantees that you’ll make money, but the odds are greater than if you don’t invest. A diversified portfolio, or spreading your investments around, gives you more stability and less emotional attachment to the stock than investing in one or two stocks. Investor Guide suggests that investing in 25 to 30 stocks gives the best reduction of risk. Enron employees demonstrated the importance of a balanced stock portfolio in 2001. The company encouraged purchasing Enron stock, and many employees had a large percentage of their investments in Enron. When the stock became worthless, the paper millionaires became holders of worthless paper. Worldcom produced the same result for stockholders in 2002. If you keep a balance of stocks, bonds and other investments in your stock portfolio, a single loss won’t devastate your holdings.
Diversified for You
A mutual fund, equity fund or an index fund combine companies or services so you don’t have to make individual choices. A mutual fund or equity fund invests in shares across a range of products and services; an index fund owns securities in the market index it tracks. A Dow Jones index fund tracks the Dow; a NASDAQ index includes the NASDAQ stock balance that is heavier on technology stocks. You can also select an index fund that is all technology stocks from both the Dow Jones and NASDAQ indexes. Choosing a specific type of stock may create less diversification with mutual funds, equity funds or index funds. These funds may have investments in some of the same stocks. Analysts suggest that you buy across industries, such as food, retail, technology and energy for the most diversification and the safest investment strategy.
Invest with Caution
If you invest money, you should set some aside for emergency funds, because you may have to sell at a loss to make the funds available when you need them. A stock portfolio is important for long-range plans, but experts suggest that you hold out money for short-term needs and emergencies. Financial author Suze Orman recommends that you hold eight months of living expenses in your emergency fund. Certificates of deposit can give you more interest than a savings account, and you may lose only three months of interest if you need the money before maturity.
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