Investors in their 30s can make small changes in their investments that will create investing habits to help keep their portfolio on track
I’ve never woken up on my birthday and said, “Well, there it is. I feel a year older.”
You don’t feel your body aging from one day to the next. The crow’s feet, aches and pains come slowly until one day you look in the mirror and wonder, “When did that happen?”
Investing for your life-long goals is a lot like getting older.
Gradually, your investing needs change as you get older. You won’t notice it from year-to-year but revisit your goals and investing needs ten years from when you started and you’re likely to get quite a shock.
This is the third in our seven-part series on life-long investing, how to match your investments with your personal needs and how your portfolio should change as you age.
Reading and thinking through how your investments should look in your 30s and comparing that to last week’s article on investing in your 20s, you’re probably going to get a sense of, “Well that wasn’t much of a change at all.”
And you’re right. Most investor’s perfect portfolio doesn’t change much from their 20s to their 30s but making these subtle changes are going to be your first test to keeping your investments on track to meet your goals.
You could skip it, wait until your 40s to readjust your portfolio. Then again, why not keep more in risky investments longer and wait until your 50s or even into your 60s to adjust your portfolio to better fit your needs.
The problem is that someday you may wake up and instead of looking in the mirror, you look at the computer screen. You’ve been investing in the same assets for 30 years while your financial needs have changed right under your nose. That morning, you wake up and realize a stock market crash has wiped out a huge chunk of your nest egg and you’ll need to push back that retirement you’ve been planning.
Make that commitment to change your portfolio as your investing needs change.
The Investor in their 30s
Just like the 20-something investor, there are some attributes that will apply to nearly all investors in their 30s. These factors like time to retirement, taxes and liquidity needs will give us a general idea of which assets and investments should be in a 30-year old’s portfolio while personal details will help fine-tune your portfolio.
Time is still on your side as an investor in their 30s with at least several decades to benefit from compounding interest on your money. This means most investors should have a high ability to tolerate investment risk, investing through several stock market cycles.
Fidelity reports the median amount saved by investors in their 30s is around $45,000 and recommends you have about one year’s salary saved up by now. Of course, that’s only guidance and you should use your own goals and return needs to judge whether you’re on track or behind to meet your goals.
If you haven’t saved that much yet or are behind on your savings goal, it’s not quite time to panic. You can still save more than enough for your retirement and other life goals but you need to get started. We’re about ten years out from the point where it’s really going to start getting difficult to catch up if you haven’t been saving regularly.
Most 30-something investors still have a decade or more before they’ll need to dip into savings to pay for college costs. As you get closer to the point where you will need to withdraw money, you should lower your risk for that portion by investing in a more conservative portfolio of assets.
If you have invested in a 529 account for college costs, you can shift most portfolio to safer assets within three- to five-years of needing the money. Since your costs will span four years, you’ll want to keep some of the money, say 25% to 45%, in stocks for growth.
If a portion of your college money is in a regular investing account, mixed with the rest of your savings, you may want to separate out the amount for college and invest it differently than your retirement savings.
Your income has grown by the time you reach your 30s and you are likely in a higher tax rate. Now may be the time to start contributing more to an IRA rather than a Roth IRA. The immediate tax deduction on the IRA contributions may mean more money saved relative to the tax-free withdrawals in retirement from the Roth account.
I would still recommend investing some money in your Roth account, maybe split 25% of your contribution to the Roth account and the rest to an IRA account, to give you more flexibility in retirement income.
How a Family Will Affect Your Investing Plan
Your investor policy statement (IPS), the written plan that lays out your financial goals and investing needs, isn’t something you write out once and forget. Your IPS is what’s called a ‘living document’ because it can change with different life events and you’ll need to revise it to keep your investments on track to meet your new goals.
One of the biggest changes that will affect your investing needs is starting a family. Whether this happens in your 20s or later in life, you’ll need to revisit your life goals and investing needs to see what’s changed.
- Getting married will mean more money needed in retirement but may also mean a higher combined income from which to save. Couples don’t often talk about finances until it’s an argument so take this opportunity to get on the same page with your long-term financial goals.
- Starting a family means expenses for education in the future. You’ve also got less time to save for these compared to your retirement expenses. Even if you haven’t thought much about college costs, start putting a small portion of your savings away so it can be ready when you need it.
- You may not have needed life insurance as a single person but will need some coverage to protect your family. You’ll likely have higher health, home and auto insurance needs as well.
- Ten years’ wiser may mean your life goals have changed. Retiring on a sandy beach may have given way to having the flexibility to stay near family.
All this means it’s time to review your long-term financial goals and the return on investment needed, issues we covered in the first article in the series. Your living expenses have likely changed and you’ll need to adjust your retirement goal if you want to keep the same standard of living.
Review the material we covered in the first article and recheck your return needs on an investment calculator. Again, play around with some of the numbers until you find a plan that meets your retirement goal and requires a return no higher than 7% annually.
This may mean either saving more, working longer or both to reach your goal with a reasonable rate of return.
A Warning about Investing in Your Employer
I wondered where to put this section but decided that it was important enough to call it out separately. Many large employers offer stock purchase plans for their employees. You don’t have to enroll in these but it might be subtly encouraged that you invest in the company’s stock. You might even be able to buy the stock at a discount to the market price.
Investing in your company’s shares can be a good investment, especially if you can get it at a discount. By your 30s, you might have started to build up quite an investment…and that can be a huge problem.
There’s no rule to how much company stock is too much but I recommend you start selling shares regularly once your investment is over 5% or 10% of your total wealth. More than that and you are taking a lot of risk in your income and investments. If the company’s financial outlook declines, you could be looking at a loss of income and a big hit to your portfolio at the same time.
Selling your shares in the company stock is usually done through a form submitted to Human Resources and there are protections so you’re not discriminated against for selling. The company’s executives regularly sell their shares, sometimes in the millions of dollars, and there is nothing wrong with adjusting your risk.
Investor Types in their 30s
We’ll continue with the three example investor types we’ve been using to give you an idea of different investing needs. These three hypothetical investors are all in their 30s but differ on other risk and return factors.
These differences in their ability or willingness to tolerate risk and other factors affect how they should invest their money for the best, and least stressful, path to their goals.
Cody has less ability and/or willingness to tolerate investing risk than the other two investors. He may have less time to invest, if large expenses like education costs are getting nearer, which would affect his ability to tolerate risk. He may just not want to see his investment wealth fluctuate much.
There is absolutely nothing wrong with being a conservative investor. The pundits on TV love to talk about ‘beating the market’ and reaching for double-digit stock returns but rarely say anything about the stress and heartache that comes from so much risk.
Consider a conservative investment plan if:
- You have less than five years to needing to withdraw money from investments, i.e. to pay for college costs. Consider separating out this money from your retirement investments so you can take less risk on the college money and more appropriate risks for your longer-term investments.
- You have little or no savings or emergency fund for unexpected expenses. Keep at least a few months’ expenses in a cash savings account or money market funds to have available for emergencies. Otherwise, you’ll need to protect your investment money in case you need it unexpectedly.
- If you plan on starting a business or switching employers, you may want to take less risk investing. Taking less investing risk can help balance the higher risk you’re taking with your income so you have back-up resources if things don’t work out.
Amanda has a stable job and isn’t planning on retiring for at least 30 years. Her income covers her monthly expenses and her family is covered from catastrophic loss through health and life insurance. Her kids are still ten years or more from college and she’s started saving for future education costs as well as for her own retirement.
Rebecca has the most ability and/or willingness to take risk among the three investors. She has been investing since her 20s and doesn’t mind the roller-coaster ride of the stock market. She deposits money in her investment account each month but doesn’t worry about the balance.
At this point in your life, there is likely nothing stopping you from taking more risk with your investments. Most investors in their 30s have several decades of income and investing ahead of them and are just entering their prime earning years. Your expenses are growing along with your family but so are your resources.
Consider a higher-risk investing plan if:
- You have been investing for years, have seen your investments rise and fall with the stock market and it really didn’t bother you. Investors with more risk in their portfolio need a Zen-like state of mind with their money, there are no guarantees but have the confidence that the stock market will rise over the long-term.
- As we saw in the prior article, size matters in investment risk. If you have more than enough saved already then you can afford to take more risk. That’s because you can afford to take some losses and still easily meet your investing goals.
Understanding Your Own Investor Type
You don’t have to match either of these investor types perfectly to relate to the investment style. You might see yourself in factors from more than one investor type, i.e. you might have kids going to college within a few years but still have a high willingness to tolerate risk in your retirement investments.
There are a couple of important points I’d stress when thinking about your investor type and how you should invest to meet your goals.
- Err on the side of caution if you haven’t been investing through a stock market crash. It’s impossible to understand how you’ll react, how much stress you’ll feel in a market crash, until you’ve lived through one. If you’re unsure about how much risk you want to take in your portfolio, choose the less risky strategy first and then adjust higher later.
- Consider separating out the money invested for different time horizons, i.e. hold money for education in a separate account from retirement money. Most online investing sites will allow you to have multiple accounts. This will mean you can take less risk with education money as the expenses get nearer but more risk, and higher return, with your retirement money.
- Investment risk is something of an irony. Investors that need a high return because they haven’t saved enough can’t afford to see what little they’ve saved evaporate in a crash and therefore should take less risk. Investors that have saved more than enough and might not need a high return to meet their goals, can actually take more risk because minor losses won’t affect their ability to still pay for expenses.
As an investor in your 30s, you’ve still got plenty of time to figure out your investor type and how much risk you can handle without stressing out. The important point is to get started, keep track of how you react with changes in your portfolio and adjust your risk for a less stressful path to meeting your goals.
Asset Allocation Examples for Investors in their 30s
Changes in your portfolio in these early years are likely going to be very subtle. You still have decades to invest and your income is rising steadily so most portfolios will still be invested heavily in stocks.
The change in time you have left to invest hasn’t started to affect your investing needs much and you’ve learned a lot about yourself as an investor. The changes you make to your investments are ultimately up to you. You may decide you want a little more risk in your portfolio for a little higher return.
However you decide to invest, make sure to keep a mix of all three asset classes. If you invest in individual stocks, bonds or real estate properties, make sure you diversify in each asset by holding different investments.
- In stocks, invest across different sectors and in more than one stock in each sector.
- The same is true in bonds. If you buy individual bonds, spread your risk with bonds of companies from different sectors and different credit ratings.
- If you invest directly in real estate, invest in different property types and across different regions. This might not be possible for many investors so supplement your direct holdings with a fund that holds a wider range of properties.
The conservative investor in their 30s might still hold the same asset weights as the 20-something investor but might start shifting their risk in stocks to the safety sectors. Again, there are some sectors in the economy (i.e. utilities, consumer staples and telecom) that typically have more stable sales and their stock prices don’t fluctuate as much.
That’s not to say that the value of your stock portfolio won’t fall during a recession, even if you are more heavily invested in these safety sectors. The Utilities Select Sector SPDR (XLU) lost 38% of its value from its height in 2007 to March 2009, a hard loss for investors looking for safety but still less than the 50% plunge in the overall market.
The conservative investor would still want to hold some of their portfolio in cash, especially if they don’t have an emergency fund or other savings. The investments in bonds and real estate will also provide some cash flow if the need to start withdrawing investments arises in an emergency.
A conservative investment portfolio for someone in their 30s might look something like this:
Again, the change from the portfolio for a 20-something investor is subtle. This portfolio holds more in safety sectors and in stocks of foreign companies in other developed markets like Europe, Canada and Japan. The high allocation to real estate is still important to protect your wealth against the long-term effect of inflation.
The average investor in their 30s is still going to have most of their money in stocks, maybe even more than the 60% I’ve allocated here. The fact is that stocks tend to outperform other assets over the long-term, more than a decade or two, and most investors need that high return to meet their goals. Even if you start investing just before a recession or stock market crash, you still have several decades to invest and will benefit from the long-term rise in stocks.
An average investment portfolio for someone in their 30s might look something like this:
I’ve kept the stock investments spread out across the sectors but increased the investment in the foreign markets fund. Considering that foreign stocks make up more than 50% of the world stock market, you might even increase your investment in the developed markets fund and add emerging markets stocks.
This is an important point that most American investors miss. It’s true that you get some exposure to the global economy through stocks in large U.S. companies but you need to invest in foreign stocks for true diversification. Emerging markets and China are becoming a bigger slice of the global economy and your portfolio should reflect that to protect against shocks to the U.S. economy.
I also increased the investment in real estate funds compared to the average investor in their 20s. Real estate provides for solid returns but also a better inflation protection compared to stocks.
The high-risk portfolio has shifted slightly from the 20s into the investor’s 30s with 65% in stocks followed by bonds (20%) and real estate (15%). If you have near-term liquidity needs, i.e. the potential for large unexpected expenses or other cash needs, you might consider holding some of your portfolio in cash if you don’t have a large emergency fund or savings.
A higher-risk, higher-return portfolio might look something like this:
Rebecca’s portfolio is still heavily invested in stocks though the investment has been spread more evenly across all the sectors instead of over-weighting the growth sectors like technology, materials and healthcare. The investment in foreign stocks has also increased.
The biggest change is that 5% of the total portfolio has been moved to bonds from stocks, increasing the holding in the broad bond fund. The portfolio still includes higher-risk, higher-return investments in emerging markets and peer lending investments.
Investment Returns for Each Example Portfolio
Since the changes to the three example portfolios have been very small, the changes to the expected returns for each will be small as well. That doesn’t mean you should neglect making these changes if your investment needs have changed. The change in expected returns may be small but the change in risk is important and all three portfolios involve less risk than the example portfolios we saw in the prior article.
The conservative portfolio lowers the risk in more volatile sectors of the stock market and away from U.S. stocks but still provides for a solid 6.88% expected return.
The expected return on the average investor’s portfolio is also similar with a 7.66% return but includes greater diversification with more foreign stocks and real estate.
As we discussed in the previous article, you might consider just investing in a broader fund like the S&P 500 but understand this carries risks that might not match your needs. The sample portfolio above invests evenly across the sectors, spreading your risk across low-risk and high-growth groups. Broader funds like the SPDR S&P 500 invest in sectors according to their weight in the index. For example, investing in the S&P fund means you’ll have 23% of your money in technology companies.
The high-risk portfolio sees the largest change to an expected return of 7.8%, which is still a solid annual return for a diversified portfolio. The risk shifts quite a bit away from sectors highly-affected by the economy and away from U.S.-risk as well as increases cash flow through the bond fund.
Remember, these are only estimates of the potential return on each portfolio based on historical data. There are other factors that go into expected return including the present value of the stock market relative to earnings, interest rates and the economic outlook. As long-term investors on long-term goals, you don’t need to worry about these and returns are more likely to even out to these long-term averages.
Closing summary and Action Steps for Investors in their 30s
Hopefully by the time you reach your 30s, you’ve been investing for a few years and have a better idea of how you react to risk in your investments. This, along with changes to your life goals, can be a big help in adjusting your portfolio to better meet your personality and needs. Remember, investing isn’t nearly as much about beating the market or picking hot stocks as it is about reaching your goals with the least amount of stress possible.
- Go back through your life goals and how much you’ll need to pay for big expenses like education and retirement.
- Make sure you are on track by checking the annual return you need to meet your goals given your current investments, time to retirement and how much you are saving.
- Reassess your investor type given your new family commitments and other changes as you age.
- Determine if you need to make any changes to your investments. Even subtle changes can lower your risk while still providing for a solid return.
Check out the other articles in the series:
- Learn how your investment needs start changing in your 40s
- Find out how to invest in your 50s to balance both safety and growth
- Protect your investments with these pre-retirement tips
- 3 retirement investing strategies to make your money last
Investors in their 30s don’t generally notice much change in their investments or risk tolerance but that doesn’t mean you should neglect reviewing your goals and investing needs. The time is quickly approaching when your investments will need to shift from a focus on growth to protecting your money to meet your goals. Making these subtle portfolio changes now can help develop the right investing habits that will help keep you on track in the future.