I'm a realistic person. Sure, I'd love big returns with little risk on my investments, but that's not typically a realistic option. In most cases, I find -- at least with my personal investing -- that I can either find safe investing options with little return, or higher return options with substantial risk.
However, over the years, I've discovered a certain strategy with my IRA that keeps my money grounded in reality.
Finding a fund with broad diversification
Some people like to put all their eggs in one basket in the hopes of getting higher returns. They heavily weight their retirement portfolio toward all stocks or they pick a fund that focuses purely on stock.
Personally, I prefer diversification when it comes to my retirement portfolio. This doesn't necessarily mean that I have to select a multitude of funds though. Instead, I utilize a fund that incorporates stocks -- both large and mid-cap, and both foreign and domestic -- bonds, and cash.
Applying dividend reinvestment with dollar cost averaging
This retirement fund not only rises and falls in share price along with the stock market, but it pays a monthly dividend that is reinvested into the fund. This helps me keep my retirement fund allocated broadly, moving realistically with the fluctuations of the market, yet earning me an annual return through regular dividends.
And with such dividends being purchased monthly, it better helps me dollar cost average my money through buying shares regularly at fluctuating prices -- sometimes high, sometimes low, and sometimes somewhere in between.
Leaving it alone
I've learned a valuable lesson over the years when it comes to maintaining a realistic approach to stocks and the stock market. In our electronic age and in a time when we're inundated with constant information, it's easy to get caught up in the stock market and its daily swings and swoons. In my younger days, this led me to watch my investments too closely, which in turn led to aggravation, frustration and poor decision making. For example, years ago I sold all my company stock when it hit $14 a share, which earned me about $4 a share on the purchase price. Several years later, the company was bought out, with share prices selling for around $45 a share.
To help stay realistic in my stock market approach, I now understand that this is a long-term thing for me. There are going to be huge swings in the stock market in both directions from time to time, but I have to let my fund work for me, smoothing the edges of these swings over a period of decades rather than worry about the day-to-day fluctuations.
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The author is not a licensed financial professional. The information provided in this article is for informational purposes only and does not constitute advice of any kind. Any action taken by the reader due to the information provided in this article is solely at the reader's discretion.
- Personal Investing Ideas & Strategies
- stock market