Investment Strategies Based on Age
BY JOSH ZAHN
We all plan to retire someday, or you may even be already retired. Learning how to save and invest during your working career greatly influences how you'll spend your retirement years. Knowing how to steward the money you’ve accrued into retirement is critical to make sure the best years are still ahead of you. The strategies you use in your early working years may not be ideal for your retirement years. Let’s go into some key fundamentals with investing strategies based on age.
With investing, there are many asset classes or "types". Most people are familiar with the asset classes of stocks, bonds, or cash. However, there are many other asset classes like commodities and real estate that are very popular. These assets have varying risks and returns associated with them.
For example, the great recession of 2008 led to a collapse of the housing market, but it also became an amazing opportunity for those that bought or held through it.
Similarly, the stock market crashed 35% in a month in March of 2020 and within a year a half, the market had doubled from the lows.
Bonds and cash can also take down volatility in these seasons and help weather the storms.
Why is this important to know? Because we don’t want to put all our eggs in one basket. Diversification is hugely important to risk reduction while still allowing your assets to go through different cycles. If one of your asset classes is tanking or down, you won’t be as tempted to get emotional if you have diversified appropriately. Many of the biggest financial mistakes people make are led by emotional decisions.
Let’s look at what your age should say about your investing allocations..
Investing by Age
The first thing to say is that everyone should have a 3–6-month minimum savings of their monthly expenses accessible without risk. While we do want to focus on growth of money, things happen, and we need to be able to take advantage of an opportunity or make it through and emergency without breaking our financial plan.
While we are younger (20’s and 30’s), we may have little to no money and have many things we are pursuing as we try to navigate our finances and make our own path. However, time is the biggest advantage we have to long term compounding returns. Thus, being very aggressive with our long-term money (90-100% stocks) in our portfolios will allow the biggest chance for growth. Stay focused on long term and do not get stressed about short term.
As we transition to really thinking of retirement (40’s and 50’s), we start to think more cautiously while knowing we really need to focus on building wealth. We may not feel as comfortable on “letting it ride” on the market like we did in our 20’s and 30’s but we still need exposure to good growth assets. Typically, we like to see 70-80% stock exposure and 20-30% bond exposure in these stages of life. Hopefully we are in our best earning years now and can really buckle down with investing for our future. Stay committed and consistent to allow your funds to work.
Lastly, as we focus on retired or almost retired in our 60+ years, we want to really dig into the goals for your money. We may think being very conservative is the answer, but many people get too conservative in retirement and outlive their savings, then have to go back to work. Finding a nice balanced approach (Typically 40-60% Stocks and 60-40% bonds) allows for our retirement money to continue the chance to grow while producing the income needed to enjoy our lifestyles we’ve dreamed of.
These are oversimplifications of general guidance. We recommend going through a risk tolerance and goal planning assessment to determine what is most appropriate for all our clients and tailor their portfolios to them.
“The best time to plant a tree was 20 years ago. The second-best time is now.”- Chinese Proverb.
This philosophy is the cornerstone of investing. Regardless of age, the best time to start investing was a long time ago. However, it’s never too late to do something.
If you’ve already started investing, then make sure the decisions you make are the right ones for your age. Your investment philosophy should age with you. We also recommend meeting with a qualified financial advisor who can help coach and manage with you along the way.
If you are looking for a financial advisor team focused on your unique financial situation, communicates openly, and puts you and your goals at the center of the relationship, call us at (480) 507-2425 or contact us online. We’d love to meet you!
The content in this article was prepared by the article’s author. Cetera Advisor Networks, LLC does not endorse its content, and the views expressed may not necessarily reflect those held by Cetera Advisor Networks, LLC.