Investing by age is about taking advantage of time for higher returns while scaling back on risk
If there is one constant in investing for nearly all investors, it’s the idea of investing by age and how our investing needs change as we get older. Even for the ultra-wealthy, the need to pull back on risk as retirement approaches is a critical part of investing and one too many investors neglect.
In fact, invest according to your age and the guidance in this infographic and you may not have to do much else. Studies have shown the majority of investing returns can be attributed to the mix of asset classes. In other words, it’s not the hot stocks you pick but your decision of how much money you put in stocks, bonds and other assets.
Read the entire investing by age series to meet your lifetime investing goals:
Learn how to get started investing in your 20s
How to Pick Investments in Your 30s for Growth and Dividends
Investing in Your 40s to Boost Returns
Investing in Your 50s for Growth and Safety
Retirement Investing in Your 60s and Beyond
Your own investing needs and retirement goals will dictate the exact proportions in your portfolio and how you invest by age. Start by creating your own personal investment plan and then use it to tweak the allocations in the graphic.
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Guide to Investing by Age
The most important rule of investing is to match your investments with your age. Investing needs and goals change as you get older, because the time to when you’ll need the money gets closer.
You’ve got decades to invest in your 20s and can bear the risk of stock market ups and downs. By comparison, investors approaching retirement can’t afford to see their nest egg evaporate in the next market crash. Investing by age is about taking advantage of time while you can and gradually pulling back on risk.
It all starts with asset classes. These are groups of investments that all react similarly to common factors like the economy and inflation. I provide a detailed chart of each asset class and how holding a mix of assets means I don’t worry about a stock market crash in another article.
Cash – Isn’t really an investable asset rather a store of value. It’s the ultimate safety asset for investing by age because it’s value won’t rise or fall quickly. Always have money set aside for emergencies and an investing cushion in money-market funds or short-term bond funds.
Bonds – are loans to governments and corporations. They represent the next step in risk from cash and get more important as you age. Hold a mix of safer government bonds along with corporate and higher-risk junk bonds to balance out safety and higher returns.
Real Estate – can be either direct holdings or investments through a real estate investment trust (REIT) that trades like a stock. REITs are a great way to get the cash flow and inflation protection of real estate without the management hassles of direct ownership. Other than the recent housing bubble, real estate is a relatively safe asset class that appreciates along with inflation and the economy.
Stocks – offer higher upside returns over the long-run but deep losses when the market tumbles. Even as you get older, you’ll still want to hold some stocks to protect your wealth from inflation and lower returns on bonds. Don’t forget to diversify your stocks across large and small companies, international stocks and different sectors.
Other Assets – This is the catch-all category including private equity, hedge funds, crowdfunding and peer lending. Many investors neglect ‘alternative’ assets when investing by age but the group can be a great boost to return and some investments may even help lower your risk.
The question of combining all these asset classes and different investments in each becomes how do you do it without paying a mountain in commissions. Investing by age won’t mean a thing if you see your returns evaporate on high trading fees. I use Motif Investing to group up to 30 investments together and then buy them all for one commission. I can buy funds or individual investments that cover each asset class and change the allocations over the years.
Investing by Age: Four Decades and Beyond
There’s no rule that will apply to everyone when investing by age so take the portfolios below as guidance rather than a target. I’ve used historical returns over the last several decades to calculate the weighted return for each portfolio. You’ll notice that the historical return decreases as riskier assets are scaled back in each portfolio.
Investing in your 20s
Your tolerance for risk is likely higher and you don’t have to worry about big changes in stock values from one year to the next. Focus on depositing money regularly and earn a higher return as you’re starting out. Portfolio return based on historical averages = 6.2%
Time is your greatest friend when investing by age. I used the following chart in another article on why you need to start investing now and why it can’t wait. Start investing in your 20s and compound interest takes over, giving you a huge nest egg on very low monthly deposits. Wait just ten years to start and the same monthly contributions add up to half as much.
Investing in your 30s
You’ve started a family and have other worries, you don’t want to be worrying about your investments as well. Start moving money into the safety assets for peace-of-mind. Portfolio return based on historical averages = 6.0%
Investing in your 40s
Many people keep their portfolio investments fairly consistent from their 30’s to 40’s but you should make minor changes to risk. By now, your portfolio is large enough to see big benefits from smaller returns so you don’t need to reach for the stars. Portfolio return based on historical averages = 6.0%
One way to keep returns higher but pull back on risk as you invest by age is to look for higher yielding investments like peer lending. I know, a lot of people will say unsecured loans are just as risky as stocks but historical data on consumer credit proves otherwise. You can build a conservative portfolio of safe borrowers on Lending Club and still see returns of 7% or higher. That’s well above rates on bonds and comparable with stocks.
Investing in your 50s
Now is the time to start pulling back on risk and enjoying the work your money has done over the last several decades. Reevaluate your retirement goals and make sure you’re on track and not taking too much risk. Portfolio return based on historical averages = 5.8%
Investing by Age in your 60s and Beyond
Sit back and enjoy! Keeping a small portion in stocks will help beat inflation while higher amounts in cash and bonds will provide for living expenses. Continue to pull money out of stocks when the market is hot and put it in bonds or cash as you get older. Portfolio return based on historical averages = 5.2%
Investing by age isn’t about making a fortune in the stock market quickly and getting out. Investing according to age is about changing your investments gradually to fit your financial goals and tolerance for risk. Do it right and you won’t have to worry about picking stocks. Take advantage of time to earn higher returns in early years while pulling back on risk and letting your money do the work as you approach retirement.