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A Guide for Investing at All Phases in Life
When it comes to investing, time is of the essence.
When your investments have more time to accrue interest, they can more build more wealth with less upfront cost. So, when you start investing early, you have an edge above the rest. But that’s not to say that its ever too late to start investing, it just means that you may have to take a different approach to your investing strategy.
We’re going to break down some investing strategy proposals customized for passive investors at all stages in life. Regardless of where you’re starting, the best to invest is now. Consider these strategy proposals to make the most out of your time in the market.
Asset Allocation
Before you start investing, it’s important to understand what makes a well-rounded portfolio. Asset allocation is a general investing strategy that balances risk and reward through a diverse portfolio containing several different asset classes.
Your asset allocation should be personalized based on every individual’s investing history, risk-tolerance, and proximity to retirement.
Asset classes are essentially the different categories of investment. The three primary asset classes are:
- Stocks
- Bonds
- Cash or cash equivalent
Stocks
A stock is a financial asset that represents a share of ownership in a company. When an individual or institution purchases a stock, they become a shareholder in the company and are entitled to a percentage of the company’s profits. Stocks can be bought and sold on the stock market, and their prices fluctuate based on the company’s performance and overall economic conditions.
Stocks are an essential asset to include in a portfolio because they can provide a good return on investment and have the capacity to grow higher returns than other asset classes, but with high risk comes high reward.
The stock market is an institution for building wealth, but stocks can be volatile. There are some stocks that are historically more stable compared to others, so it is important do diversify your stock portfolio to reduce risk and promote higher returns.
Bonds
A bond is a type of debt security that represents a loan from an investor to a borrower. Bonds are issued by corporations, federal agencies and government to investors like you. When an investor buys a bond, they are lending money to the issuer, who will repay the principal plus interest at a predetermined date. The interest rate and repayment date are outlined in the bond’s prospectus. Bonds pay a fixed rate of interest until they mature; you can keep a bond until it reaches maturity or sell it before it matures.
Bonds are an important asset class to include in a portfolio because they provide stability and steady income. Unlike stocks, bond prices are far less volatile, making them a good choice for risk-averse investors. Even though bonds are regarded as less risky than stocks, you can still lose money on a bond if the issuer defaults.
Bonds also generate steady income in the form of regular coupon payments, making them a good way to supplement a portfolio’s overall return. Bonds are also a good way to hedge against inflation, as the fixed payments help to protect your money’s buying power over time.
Investing in your 20s
Stocks: 80% to 90%
Bonds: 10% to 20%
Investing in your 20s is a great way to get a head start on your financial future. You may have just graduated college or just landed your first job, but it’s important to take this time to get ahead. Make investing a financial priority form the get go, and your future self will thank you.
When you’re young, you have the power of time on your side. This means that small investments now can have big returns down the line. Investing now will give you the advantage of compounding, which is when the returns on your investments are reinvested to generate even more returns.
When you start investing early, you have the opportunity to take on higher risks because you have more time in the market. Build your portfolio with growth stocks while you have time on your side and focus less on bonds.
Investing in your 30s
Stocks: 70% to 80%
Bonds: 20% to 30%
If you didn’t start investing until your 30s, that’s okay. You still have time on your side, your investments will have enough time in the market to compound.
Because you missed out on the market in your 20s, you should consider contributing more to your portfolio to catch up. Now is the time to start investing 10% to 15% of your income.
Of course, your mortgage and retirement funds should be your first financial priority, but if you have the income to invest- don’t wait any longer.
Investing in your 40s
Stocks: 60% to 70%
Bonds: 30% to 40%
If you’ve waited to invest until now, you 40s is the time to be aggressive with your portfolio building.
In your 40s you are likely at the peak of your career and at your highest earning potential, this gives you a bit of edge in the investing world. Take a front seat in your portfolio, focusing on stocks with moderate risk and steady-income bonds.
Investing in your 50s and 60s
Stocks: 50% to 60%
Bonds: 40% to 50%
When reaching retirement age, your investing strategy should be centered around protecting your wealth and minimizing risk. This means focusing on income-producing investments, such as dividend-paying stocks and high-yield bonds. You should also consider investing in growth assets such as stocks, as this can help to ensure that your portfolio’s value keeps up with inflation.
Investing Post-Retirement
Stocks: 30% to 50%
Bonds: 70% to 70%
After retirement, investing should be focused on preserving your wealth and generating income. This means investing in low-risk, income-producing assets such as dividend-paying stocks and high-yield bonds.
The Bottom Line
Your investing strategy is personal, it all boils down to your goals and the amount of risk that you can take on at any given point in your life. Although investing is highly personal, there is one universal truth; the best time to start investing is now.
Investing is one of the best ways to ensure long-term financial security. The earlier you start investing, the more time you have to benefit from compounding and to take advantage of market opportunities. No matter where you are in your financial journey, your future self will thank you for investing as soon as you could.