Investing Extra Income and The Value of Diversification

Making money is something we all want to do.  Not just making money, but for many people it really means making more money that we currently earn.

So how do we do this?  Well, one way to do it could be to focus on one’s career.  Getting promotions and/or switching jobs opportunistically (but not too often) to earn a higher income can be a great way to accomplish this.  The earlier in your career you grow your income, the more you can save.

Another way to do this would be to earn side income.   Seemingly growing in popularity, and certainly a topic that’s discussed more and more on personal finance blogs.  There are so many ways one can earn side income, ranging from blogging to tutoring to dog walking and points in between.  There is a side hustle opportunity for so many things!

This is all great, and as we know, it’s making more money can be a great way to build wealth.  However, that could be an incomplete approach.  It’s been discussed before, but the question of what to do with side income can really apply to any incremental income.  What can be done with it?

Keeping everything in cash might seem safe, but that’s not likely to appreciate versus inflation :)  One could also choose other low-risk or alternative investments, but those can be a potential part of a diversification plan.

What might make sense, and what fits conventional wisdom, would be to diversify the use of this extra money.  One aspect of diversification that can be profitable for many people is stocks.  Investing in stocks can be a tremendous way to grow net worth, though of course even within share trading there can be opportunities to diversify as well.  Of course one can invest in different companies within different industries.  There are also different investment types, besides individual stocks there are also ETFs and funds.

Additionally, people can diversify in terms of where the stocks are actually traded.  Quite often people trade in the U.S. stock market, as the Dow and S&P 500 are two widely followed baskets of stocks that are watched to gauge the strength of the domestic market.  Additionally, there are plenty of other markets as well.  There are opportunities to invest in stocks in the U.K. market, Japanese (NIKKEI) exchange, Australian stock exchange, the market in Hong Kong, and others.

However one does it, stocks can be an important part of a person’s portfolio.  When allocating assets, generally speaking many people do keep some portion in stocks.  The longer the time to retirement, often times the higher the percentage of investments that many people are willing to put into stocks.  While people should always think about risk as well, the growth potential of stocks, including those within a diversified portfolio, can be hard to ignore.

What it comes down to is that it takes more than just making additional money to get ahead for a lot of people.  Investing that additional money could potentially supercharge that growth.

Readers, do you actively invest extra (or regular) income? How do you choose to diversify your stock investments?

 

2 thoughts on “Investing Extra Income and The Value of Diversification

  1. Jon @ MoneySmartGuides

    I invest a portion of my regular income as well as my side income. For my investing, I usually break it out proportionally, with the same amount going into each fund. Sometimes thought I will just rotate it as well. In this case, I will invest 100% in fund A and then next month 100% in fund B, then fund C, etc.

    When year end comes and I review my portfolio for the correct weightings, I will focus on one fund if needed to get things back into balance.

  2. Eric

    I pool all of my income into one bucket, and the save and invest all of the leftovers. I would never spend extra just because it is there. That’s bad mojo.

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