High Interest Investments

It probably goes without saying, but high interest investments come with high risk. There are many companies that will tell you otherwise, but the truth is if there was no risk, the investment would be picked up institutionally and of course, it wouldn’t be high interest any longer. This doesn’t mean that high interest investments are bad, quite the contrary I think a lot people pass on this type of investment as they do not want the risk. However, this doesn’t mean your portfolio should be the Wild West. It just means that you should have a diversified portfolio that includes high interest investments and of course, some conservative options to protect your nest egg.

As a rule of thumb, when you are first starting out you should take a lot more risk than you would once your portfolio becomes large. Simply, if you lose your initial investment or diminish it considerably, it won’t be the end of the world. However, if you invest every month for many years and then you lose your nest egg, it can be completely devastating.

High Interest Investments Allocations

Even passive investors have to figure out how they want to allocate their money. This could be their 401k, or their own personal investment account. This can be a difficult decision and the advisers are not much help when you are first starting out. They do not want to deal with your small portfolio as there is no money they can make.

This leaves employees scratching their heads and not knowing what they should be doing. Or they simply invest in a bond fund or something safe and do not get a reasonable return on their money. You do not have to be a financial genius to manage your 401k. Simply you have to allocate your money properly based on your risk tolerance and how far away you are from retirement.

You should look at your portfolio in 20% chunks that get moved around every five to ten years. For example, when you get your first job, you have absolutely no money in your 401k. At this point as much as 100% of your funds should be in high interest investments. Of course, you have nothing to lose and going conservative does not make sense right now.

However, as you age and gain both money and of course get closer to retirement, you should plan on moving chunks of your money into safer investments. Where you may start out with funds that invest in developing countries and REIT’s, this will look much different when you are 55 and nearing retirement.

This process becomes more difficult as you get older, but are still not in sight of retirement. When you are in your forties for example, you should have a considerable nest egg in your 401k, and your tolerance for risk may shrink considerably. A typical allocation during this time period may be 60% in conservative funds and 40% in high risk, high yield funds.

Once you get into your fifties, your main goal should be to get a modest return, and protect your money at all costs. However, if you have a considerable amount build up, you can still allocate a small portion of your funds into high interest investments. However, this should never exceed 20% and you should even limit this once you get towards sixty.

Ending Your High Interest Investments

Once you are within around 10 years of retirement, you should move towards protection mode. In other words, the riskier investments in your portfolio should be divested. Starting from around 11 years from retirement, start to look for a good time to get out of these high interest investments. If things are rough, you can even hold out until you are nine years from retirement in the hopes that things turn around and you regain your profits or at least lose less.

No matter what, you should have a conservative investment portfolio when you near retirement. Not only should it be conservative, it should also be allocated into many different types of funds or investments. Your #1 goal is to protect what you have worked your entire life to save. This may mean smaller returns, but you should give yourself the best chance of keeping every nickel you have when you go into retirement. By ending your high interest investments you are giving yourself the best chance to retain your balances.