No matter what your attitude is toward money, the one thing that we all have in common is the need for financial security. The safest approach is to start a savings account, but that won’t get you too far when it comes to big life events like buying a home, raising a family or getting ready for retirement. While it’s important to accumulate cash for emergency liquidity, it’s equally important to devise a smart investment strategy to grow your wealth.
You have to make sure that it’s flexible enough to change as your life circumstances change. This approach requires you to think realistically about your future and get really specific about how much money you need to live comfortably at each stage of your life. Only then can you create a detailed plan on how to get there. Read on to learn the basics.
Tweaking Your Life Stage Investment Strategy
Importance of Asset Allocation
A savvy investor will spread their risk across a range of investment platforms, and how much of your nest egg you place in each basket is determined by your long- and short-term financial goals, which will change as your life circumstances change.
Investments are usually divided up into four categories: stocks – both domestic and international, bonds, real property and cash. While there are no hard and fast rules about asset allocation, there are some general guidelines that cover situational risk tolerance.
High Risk
When you’re just starting out in your career, and you have no dependents, you can generally afford to take a more aggressive approach to investing while building a solid financial foundation.
This is the time to open a retirement account, start building an emergency cash fund and invest more heavily in stocks. A good ratio is to put 50% of your money in the stock market, 30% in bonds and the balance in real estate or savings.
Moderate Risk
This is the life stage where most people are becoming established in their careers, and when they decide to get married and start a family. You may have to open a college fund or buy a larger home, and your asset allocation should move toward building on your foundation and ensuring stability.
A good spread at this time is 15% stocks, 60% in bonds and 25% in real estate and cash accounts. This is also the time to up your retirement fund contributions and increase your life insurance coverage.
Low Risk
Moving some of your investments to platforms that have a lower risk of loss is essential when you’re nearing retirement age and have a shorter time-frame for adding to your nest egg.
Conservatively speaking, this is the time to reduce your stock portfolio to about 10% overall, change your bond ratio to about 15 – 20% and put the balance into a cash vehicle, like a CD or money market account.
When It’s Time to Change Investment Strategy
If you find yourself white-knuckling it through every blip in the stock market or you have an unexpected financial need – like a medical emergency or sudden career change – you need to be flexible enough to deal with it without losing your momentum.
That’s why it’s important to re-evaluate your portfolio at regular intervals. Part of becoming a successful investor is learning what to buy and when to buy it, when it’s time to sell and when to wait and see.
However, there are some occasions when it’s necessary to re-tool your entire approach to savings and investments, such as:
- When your risk level or tolerance changes
- When your life circumstances suddenly change
- When your investments are performing above or below your expectations
- When your investment platform changes, such as contribution requirements or tax liabilities for mutual funds or IRAs
The Foundations of Investing
No matter what life stage you’re entering or how tolerant you are to taking a risk, there are some investment rules that will never change. Laying a solid foundation for financial stability is based around these principles:
- Always put the tax implications at the forefront of your investment strategy, and invest in ways that will limit your liabilities.
- Take a goal-based approach that’s specific. For example, don’t just say “I want to save for retirement.” State at what age you want to retire, and set your financial goals to meet that target date.
- Never invest money you can’t afford to lose.
- Develop discipline, stay focused on the big picture and keep your investments in line with your goals at each stage.
- Get ongoing advice from an experienced, reputable financial manager.
If you’re still confused about investing, there are online sources – for example, David Kiger posts and other personal investment blogs – that are available to provide advice that’s easy for the average person to understand.
You don’t have to be a money management wizard to successfully plan for future financial security. You just have to know where to find solid investment advice that you can trust.
However, always protect yourself by doing a little fact-checking before putting your hard-earned money into any investment, no matter how good it sounds.