This episode is the fifth part in a series about your post-divorce finances. This series will help you make more informed decisions about your finances during and after your divorce. If you have not already heard the first four parts of this series, be sure to listen to them because they build upon each other. This episode will use a lot of the terminology that was explained in the last episode.
Here, we will discuss the investments you will need in your post-divorce life. Investments are a very complicated topic, and people spend their entire careers specializing on a single facet of investing. Therefore, this series will only be a brief introduction.
When you sign your divorce papers, you will usually find yourself with a sum of money. The amount will vary, but you will probably not want to leave it in a bank account. Rather, you will more than likely want to invest it so that you will see better returns.
Most of you have many years left ahead of you, so you will want to plan for the rest of your life. Keep in mind that you do not need to rush to invest as soon as the divorce is settled. Many people take some time to settle into their new lives before making major financial decisions.
To keep it simple, you will probably want to invest in a mix of stocks and bonds. More elaborate investments are unnecessary. The sooner you expect to withdraw that money, the more bonds you should have.
Stocks suffer from the volatility of the market. Therefore, if you are older and your portfolio is stock-heavy, you may find that an economic downturn has a severe financial effect on you. However, if it will be many years before you need to use that money, it makes sense to invest in stocks. As long as the economy continues to grow, your stocks could increase in value over the long-term. If you wait out any short-term volatility, you will receive higher returns.
Bonds have less volatility, although they also have lower returns. If you are near retirement, then your investment portfolio will probably have more money invested in bonds than stocks. You want to have the certainty that the money will be there when you need it.
Depending on your financial advisor, you may consider commodities (e.g., gold, oil, wheat) or real estate. However, mutual funds and hedge funds are still essentially investments in stocks and bonds that are managed for you.
Investment returns are uncertain, but one thing that is certain is that lower fees will give you better returns over the long term. For both stocks and bonds, index funds have lower fees. There is nothing wrong with a simple, boring investment portfolio.
Ultimately, it will be best if you understand what you are investing in. If you do not understand it, you do not have to put your money into it. You will need to do further research to understand all of your options, but remember that a lower-cost option will ultimately benefit you in the long run.
In the next episode, we will discuss how to tell if your financial advisor is doing a good job for you.
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