The best investments for your 50s will give you peace of mind and the returns you need
Investing in your 50s can be hugely rewarding but it can also be extremely scary for some. If you’ve been investing for a couple of decades or more, even less risk in your investments can yield big portfolio gains.
But you’re also getting closer to the point where you are going to be relying on your investments for living expenses. Investing too much in stocks and other risky assets can feel a little like playing Russian roulette with your money.
It’s here, investing in your fifth decade of life that you really have to take a hard look at your investing goals, your portfolio and how it all plays out over the next decade.
This is the fifth post in our series on investing by age. There are a lot of personal factors that go into investing and nobody can tell you exactly what you should have in your portfolio but there are some good guidelines you can follow around how much to have in each asset class.
Check out all the posts in the investing by age series:
- This guide to investing by age and infographic will get you started with the idea
- How to Pick the Best Investments for Your 20s
- Best Investments for Your 30s
- How to Pick the Best Investments for Your 40s
- Retirement Investing in your 60s and Beyond
Investing in Your 50s: Less Risk, More Return
A lot of readers have emailed saying my portfolio allocations in the prior decades were too conservative. They felt that since stocks offer the highest average return over periods of more than a decade then anyone with more than 10 years to retirement could be totally invested in stocks.
We’ll get back to that point in a moment but investing in your 50s is the first decade that almost everyone agrees, you need to start scaling back on risk.
Investing at the very peak of the market and just before a stock market crash, it would have taken you an average of about three years to make your money back on crashes back to 1929. That’s not too bad but most of us don’t have the luxury of nearly 90 years to average out the numbers.
Looking at individual stock market cycles and the time you have left investing in your 50s, the story becomes a little different.
It would have taken seven years to recover from the 1929 crash when accounting for dividends and deflation. Investing at the peak in 1972 would have meant eight years clawing your way back to break even after the crash.
Most investors in their 50s wouldn’t have the patience to wait out that kind of a recovery and would end up selling before their portfolios rebounded. With no time left to save and invest more, it would mean missing their investing goals by a long shot and drastically reduced spending in retirement.
The solution for investing safety in your 50s…pulling back on risk in your portfolio. The target asset allocation calls for just half your investments in stocks, followed by bonds (25%), real estate (15%), and five percent in both cash and alternative assets.
Some investors will argue that you should have more in cash and nothing in alternative assets. You shouldn’t have any cash needs from your portfolio for quite a few years and the larger bond portion produces cash so I don’t think you really need more than 5% at this point.
Holding 45% of your portfolio in relatively safe assets like bonds, real estate and cash mean you should have plenty of liquidity if a stock market crash occurs near your retirement. That means you can start taking money out of your bonds as they mature to pay for living expenses while you wait for stocks to rebound.
There is a silver-lining to the idea of taking less risk in your portfolio for each decade of life. If you’ve been investing for 20 or 30 years, even less risk in your portfolio can still produce some serious money each year.
Using long-term average returns for each asset class, the portfolio above would still produce a 5.8% annual return. That means a gain of $29,000 on a portfolio of half a million dollars.
Picking the Best Investments for Your 50s
As we’ve talked about in prior articles in our investing by age series, investing isn’t really about picking the best investments. Your choice of asset classes and how much you invest in each is the biggest factor in your long-term returns.
As for individual investments, there are a few things you should remember to earn the average return on the asset class and avoid the big investor mistakes.
- Invest broadly across the asset class. This means owning stocks or bonds from each of the sectors and from large and small companies. The easiest way to do this is through buying index ETFs or those based on sectors.
- Watch those investing fees. Trying to invest in many individual names across each asset class can mean making dozens of purchases every quarter. That’s going to eat into your investment gains even on the cheapest discount online broker. It’s one of the reasons I like Motif Investing so much. For just one $10 commission, you can buy an entire group of 30 stocks or funds.
- Don’t get emotional about any one stock or invest more than around 3% of your portfolio in it. That’s just setting yourself up for failure if something happens to the company. The idea isn’t to get rich on one investment but to be diversified across the entire asset class and make money gradually.
How Much Risk Should You Have Investing in Your 50s?
There are arguments for having more risk in your investments all the way up to your 60s. I wouldn’t agree that you should have all stocks but you might take more risk than I’ve modeled in this investing by age series.
The problem with investing more in stocks than we have in our allocations is that having something in bonds and other assets is just as much about opportunity as it is about risk. Holding a portion of your portfolio in bonds means you’ll have lots of cash available if the stock market takes a dive.
I had about 30% of my portfolio in bonds and cash during the 2008 crash. With each 15% drop in the stock market from its 2007 peak, I took some money out of bonds and rebalanced to stocks. Instead of taking more than five years to get back to even on my stocks, I was back in less than three years.
Coming back to the idea of personal factors in investing, there’s also an argument for having even less risk than we’ve modeled in our investing by age series. We looked at factors like risk tolerance and portfolio size in the previous article that could mean holding less in stocks in your portfolio.
Whether you just started investing or you’ve been investing since your 20s, the best investments for your 50s are going to be those that make sure your money is there when you need it. Investing in your 50s means understanding your limited time horizon for cash and the potential for a long wait after a stock market crash.