- Shares offer a good way of diversifying and of maximising your return on investment for retirement
- The percentage of shares held in your portfolio should drop as you get older, to match your changing needs
- Look for diversification in terms of the industry, location and type of stock
The thought of retiring early can seem like an unrealistic dream. Most people simply struggle on at work, slowly making their way towards retirement age when they will finally be able to live life more fully.
Yet, it doesn’t have to be like that. One way that you can leave work at a younger age and get more out of life is to choose the right mixture of stocks. Let’s take a look at how you can get a solid combination that eases your path to financial freedom.
How Much of Your Investment Should Be in Shares?
There is some debate over how much you should invest in shares for your retirement. A general rule that some people like to use is to subtract your age from 100. The figure that is left is what percentage of your overall money should be in stock.
- When you are 30, you can hold 70% in shares
- For a 40 year old, 60% of their portfolio can be in stock
- A 50 year old will lower their percentage to 50
- By the time you reach 60, this will drop to 40%
This is a good starting point, as it gives you the idea of lowering your shareholding as you get older. This makes sense, as you will need more liquidity once you retire and will also want to lower your risk levels as you consolidate your life earnings.
Therefore, you need to make money on your shares strategy when you are young. This is when the majority of your savings go into the stock market. However, we still need to consider the question of how that total is broken down between types of shares.
Choose Blue Chip Shares for Stability
Blue chip stock means shares for large, well-known companies. When you think of the bank you use, the supermarket chain you shop in and the company you insure with are probably all blue chip.
If we look at the FTSE 100, you could argue that it mainly or only features blue chip companies. The same applies to shares that are listed on other big, reputable exchanges such as the Dow Jones Industrial average.
There are a few key points to bear in mind here
- There is no exact definition of what a blue chip company is
- They are generally considered to be the biggest, most stable companies
- They are found on the most reliable stock exchanges
- There is no guarantee that a blue chip stock won’t lose you money
- You should get a steady return, possibly with regular dividends
Having looked at all of that information, we can see that this is a solid option for stability and steady returns. Therefore, it makes sense to increase your percentage of blue chip stocks as you get older.
This is the type of share that you could hold onto all of your life, picking up dividends and watching it grow slowly but surely year on year.
Take a Look at Penny Shares
You can add diversity to your portfolio by adding in penny stocks. These are shares that are currently at a low price but that may explode in value at some time.
You will want to buy these shares when you are younger and willing to take more risks. Many of them won’t make you any money at all, but choosing the right one can see you earn a handsome profit.
There are plenty of online services that will advise you of the latest penny shares news. It is an engrossing type of investment that could take up a fair bit of your time, as you need to buy and sell at the right time to make a profit.
Choose Diverse Industries and Locations
Having a large percentage of shares in your portfolio doesn’t have to mean a lack of diversity. You can still achieve a good mixture by choosing different types of stock. This will protect you from any industry-specific problems causing too many problems.
For instance, if you have all of your stocks in banks or technology then a crash in that particular industry would be disastrous. By spreading it around, you will lower the risk. In the same, don’t rely purely on companies that all operate in the same geographical region.
Shares are as good an investment as they have ever been. The fear of volatility stops some people from choosing this option, but provided that you get the mix right, it could be your passport to an earlier and happier retirement.