Determining Your Investment Strategy by Age
Now is always a great time to reevaluate your investment portfolio and consider appropriate opportunities relative to your current lifestyle and long term-financial and investment goals. How your investments should be positioned doesn’t just depend on current market conditions.
Elements to consider include your timeline, comfort level, growth objectives, current income needs and more. Your investment horizon will differ depending on your life stage, so here are some key considerations on how to invest based on your age.
How to Invest if You Are Younger
It’s common to think investment decisions are easy for younger people who have a long investment horizon before retirement, and there’s a tendency to opt for an ultra-aggressive plan. That may be appropriate for committed retirement savings, but it’s not always best for all savings. Here are some examples of savings that benefit from a more conservative approach:
College savings: Perhaps the most common investment mistake relates to college savings. While your child is young, their investment horizon for college is likely to be shorter than yours is for retirement. For this reason, college savings should be appropriately conservative.
Down payment: If you are saving for a house, investing can increase your down payment potential. However, it also puts your savings at risk. It is best to keep your down payment funds in more conservative investments, or even in cash.
Job change: If you are considering or facing a job change, it’s wise to have at least six months to a year’s worth of cash flow needs readily available in stable savings. (For related reading, see: Why You Absolutely Need an Emergency Fund.)
Investing Before Retirement
If retirement is still some time away, you hopefully have the ability to ride out a market downturn without struggling to pay your bills if stocks tumble. However, if your retirement is closer, stock exposure becomes much riskier. Perhaps the most important question to ask yourself is how you will react if we experience a market downturn as you near retirement. If you think you might panic, you should reduce your stock risk while the markets are higher, rather than doing so at market lows. But keep in mind your retirement will ideally span a number of decades. For most people, this requires investment growth, which means not becoming too conservative.
If your retirement date is within the next five years, it’s important to ensure your investments are positioned to help replace a portion or all of your paycheck at that time. Holding at least five years’ worth of projected retirement income needs in cash and bonds secures income resources regardless of stock performance.
Investing Doesn't End When You Retire
If you’re already retired, your investment considerations broadly align with those of someone approaching retirement. This is particularly true if you’re in the earlier phase of retirement. Remember that people are living longer than ever. Celebrating your 100th birthday is a real possibility. As individuals age, their mix of stocks and bonds will change, typically becoming more conservative over time. That said, you need to remain alert for growth potential to help sustain the years ahead.
While long-term growth is important, so too are sufficient safety nets like cash and bonds to protect your financial well-being during a market downturn. All investments carry some inherent risk, along with the potential for asset growth. Determine how much risk you’re comfortable with, how much growth you need and your time horizon for investments. These are key elements of your investment strategy.