getting started life-long investing plan

How to Get Your Life-Long Investing Plan on Track Today

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Stop losing money on stocks and get your life-long investing plan on track today with this retirement investing series

Nobody cares more about your money than you do.

While you may not have the years of professional experience managing investments compared to a financial planner or advisor, you also don’t have the conflicts of interest or client work-load they bring with them.

There are lots of different advisor business models from those that make money by selling you expensive investment products to those that get a percentage of your assets each year. I don’t want to get into a discussion about which is best or the conflicts in each that keep them from really helping clients.

That’s not what this article is about. It’s about how you can take basic investment concepts, put them together in a simple investment plan and manage your own money through different life stages.

Check out the other articles in the series:

This article is the first in a seven-part series of life-long investment planning. We’ll cover all the basic investing concepts that will be the building blocks to your portfolio of assets. We’ll look at why most market timing doesn’t work and how to ‘time’ your investments for the only real way to ‘buy low and sell high’.

We’ll also talk about the most common mistakes in investor behaviors, the problems that are hard-wired into our brains that cause investors to lose money.

Finally, we’ll talk about how to understand what type of investor you are according to your goals and tolerance for risk. We’ll look at three investor examples that will be used throughout the series to help you determine exactly how to invest your money from as early as your 20s and into retirement.

How Much is it Worth to Manage Your Money?

Managing your own investments may see complicated at times but there are some very important reasons to go the do-it-yourself route.

An investment advisor can ask all the questions they want but will never know exactly what you want to do with your money, what kind of risk you’re comfortable taking and what investments you need.

Your advisor may be able to do a good job getting you set up with some initial investments but unless you are an ultra-wealthy investor with a dedicated advisor, they will never be able to devote the kind of time on your portfolio you need.

The Association of Professional Financial Advisors reports that the average advisor services 200 clients.

That means they can spend about 10 hours on each client’s portfolio a year.

How can anyone truly know what’s best for your money on less than 10 hours a year?

Remember, most advisors get paid a percentage of the amount you have invested. If you’re a client with a smaller portfolio of $150,000 or less, they may not even spend that much time on your investments. It’s just not worth their time.

Another reason to manage your own money…how about $120,000 reasons?

The average advisor takes between 0.5% to 1.5% of your total portfolio as a management fee each year. They get that money whether you make money or not and most people with less than a few hundred thousand to invest are going to be paying at the higher end of the fees.

Say you’re able to invest $500 a month and earn a 7% return each year. At the end of 30 years, you’d have nearly $567,000 dollars…that is, if you managed your own investments.

Asking an advisor to manage your money would cost you $120,040 over those 30 years at 1.25% a year in fees.

can i manage my own investments
How Much Does Investing Cost with an Advisor

How to Define Your Goals, Return Needs and Risk Tolerance

What is the most important starting point in investing your money? What is that one thing that will make or break your journey to financial freedom?

Judging from what you see on TV or the internet, you might say picking great stocks or avoiding stock market crashes.

It makes sense right, the most important thing in investing is finding great investments?

That’s why most investors lose money! The average investor earned just 2.6% annually on a stock/bond portfolio over the decade through 2013. That’s against an average annual return of almost 8% in stocks and over 4% in bonds.

The most important concept in investing, where it all has to begin is with your goals.

What do you want to do with your money?

If you don’t know your goals, you’ll never know which investments to pick. You’ll bounce around from stock to stock and lose money. You can’t take this financial journey without knowing your destination.

So let’s talk a little about financial goals.

We’re talking about life goals here, things like retirement, paying for kids’ education and buying a home. These are things that costs hundreds of thousands of dollars so we’re not going to be worried about a few thousand here or there.

The Merrill Lynch Finances in Retirement Survey estimates that it costs an average of $738,400 to retire. That’s about enough to provide for $32,000 annually in retirement after taxes plus social security.

investment planning for retirement
Investment Planning for Retirement

The College Board estimates the cost to attend a public university for in-state residents at just under $200,000 for four years. That’s for tuition, fees, room and board.

These are just estimates and it is so important to make your own goals. Goals based on your own plans are obviously going to be closer to how much you need than any estimate but there’s another very important reason to make your own financial goals rather than using averages.

Thinking through your own goals makes them real. It gives you a mental image, a destination for why you are saving and investing.

One of the biggest problems for investors is finding the motivation to put money away for 30 years. Life comes up and you want to enjoy the now. Without that motivation of being able to look to your goals, it’s going to be extremely difficult to stick to your plan.

So here’s what I want you to do to creating your financial goals.

  • Start by estimating your living expenses in retirement. The rule of thumb is to estimate around 80% to 90% of your current monthly expenses, that’s your current costs times 0.8 or 0.9. Most people spend a little more in their first few years of retirement but then less as they get older.
  • Remember, you’re not going to have some expenses like saving for retirement or education and you may not have much left to pay on your mortgage.
  • Add in any spending for bucket list stuff you have always wanted to do like trips and charity work.
  • If you plan on paying your kids’ college costs, or partial costs, add those in to your goals.
  • Don’t just put a number on your goals but actually visualize what life will be like. What things will you do on a daily basis? Where would you like to travel? What hobbies would you like to do and what will you check off on your bucket list? It’s this mental picture that will be so important, taking it out to dream every once in a while, to motivate you to keep saving and investing.

If you have an idea of annual expenses you’ll need to cover in retirement, a rule-of-thumb is to multiple this number by 20 to get the amount you need saved. That will mean you can withdraw between 4% and 5% a year from retirement savings and not worry about running out of money.

Once you have a clear picture of how much those goals will cost, you can get an idea of the investment return you need on your investments and how much you need to save each year.

Let’s say you’re going with a cool million as your magic number, the amount you need to build over the next 30 years to retirement. You know how much you can save each month and how much you already have saved up.

So how do you get from here to a million? It’s called your return requirement, the annual return on investments you need to reach your goal.

There are hundreds of return calculators on the internet that will help you find your return requirement. Let’s look at the one available on Bankrate.

  • Investment goal is the amount of money you need at retirement.
  • Years to accumulate is your planned retirement age minus your current age.
  • Amount of initial investment is how much you’ve already got saved for retirement.
  • Rate of return on investment is how much you need to earn annually to meet your goal. Start with 6% and we’ll talk about how to fine-tune it next.
  • Periodic contribution is how much you can invest per year so multiply your monthly savings by twelve.
  • Contribution frequency will be ‘per year’ and compound interest should be set to annually.

how to use investment calculators to manage my portfolio

Finding the return you need means a little bit of trial-and-error. In the example above, I had to increase the return to 6.1% to get the other estimates to produce one million after 35 years with $8,500 invested each year.

Some tips to using the investment calculator:

  • You’re not just trying to find the return you need on investments but a reasonable return. Don’t expect to earn more than 7% annually on your investments. We’ll be using your return requirement later to decide on investments so it’s important to understand what’s realistic. Reaching for a very high return might not be realistic if you don’t want much risk in your portfolio.
  • If the calculator is saying you need a return over 7% annually, then you’ll want to look at some of your other numbers. Can you save more each year? Can you retire a few years later?

The best-case scenario is a required return of between 4% to 7% annually. This will let you invest in a mix of assets including stocks, bonds and real estate to lower the risk in your wealth. If you need a return under 4% annually, you might consider increasing your retirement goals or decreasing the amount you save. If you need a return over 7% annually, try adjusting some of the numbers to bring it down to reality.

Another very important part of investment planning is understanding your tolerance for risk. This is probably the most commonly missed or altogether neglected step for most investors but hugely important to being able to sleep well at night when stocks tumble.

People have different levels of risk they can tolerate before it causes them to completely freak out. Some people love roller coasters, sky diving and gambling. To others, these activities might haunt their nightmares.

That personality type comes through in investing as well.

The thrill-seeker might not think twice about seeing their portfolio value fall 20% in a stock market crash. It’s all part of the action of investing. To the person that is more comfortable with a slow-and-steady approach, that kind of a drop would turn their hair grey.

The danger is not investing according to your own risk tolerance, your personality-type.

Let’s look at a couple of examples:

  • Investor A worries about everything. He doesn’t like taking big risks and has just 15 years left to retirement. He hasn’t saved nearly enough and needs a 10% annual return to meet his investment goals so he puts everything in penny stocks and other risky investments.
  • Investor B is unshakeable. She doesn’t mind risk and has several decades left before retirement. A coworker talks her into investing most of her money in investment-grade and government bonds.

Neither of these investors will likely meet their retirement goals because they are not investing according to their risk tolerance.

  • Investor A is reaching for unrealistic rates of return and investing in extremely risky investments, despite their risk tolerance. He’s going to freak out at the first sign of stock market trouble and dump his investments at a loss. He’ll lose money and be further away from his goal.
  • Investor B probably isn’t going to get the return she needs with a portfolio of bonds. She’ll get bored and frustrated watching her portfolio creep up so slowly compared to the stock return and end up getting discouraged. She doesn’t mind the risk and could put more of her money in stocks for a higher return.

Finding your risk tolerance for investments is actually fairly easy with a few questions about your personality and how long you have to invest. Check out these risk tolerance questions and we’ll build three investor risk types into the series to help understand how different investors might manage their money.

Why Asset Allocation is More Important than Stock Picking

Getting your goals, need for return and risk tolerance down means you can actually start on an investing strategy. Again, without these three critical pieces first, you’re on a road trip with no map and no destination.

But we’re still not yet to the point where we will be picking individual investments. We’ve still got a more important investment concept to cover.

All investments are separated into asset classes, groups of individual investments that share common characteristics. Investments in an asset class will generally share similar risk in returns and underlying factors that cause prices to go up or down.

For example, stocks are an asset class. While stocks of companies in different industries may react to economic news differently, all stocks are an ownership on future cash flow of a company. Stocks generally benefit from economic growth, low inflation and stable interest rates. Since stocks offer no guarantees, their prices rise and fall quickly depending on investor expectations for a company’s future cash flow and these economic factors.

Bonds are another asset class. Bonds, or fixed-income investments, are debt borrowed by companies or governments and sold to investors. Within the bond is a contractual interest payment and conditions that allow investors to get their money back even if the company goes bust. Bonds benefit from falling interest rates and low inflation, usually two things that happen when the economy isn’t growing. Because bonds have these investor assurances and guaranteed payments, their prices and returns do not rise or fall as quickly as stocks.

There are five asset classes, though some advisors would argue that commodities isn’t an asset class.

asset class definitions and risks

As the table shows, investments in each asset class can have widely different risks and returns. Stocks and alternative assets offer the potential for higher returns but investors also face the very real prospect of total loss. Investors in bonds may not realize high returns but are protected from some risks.

The next table shows the annualized returns and risk over the last ten years in the different asset classes. Risk is measured by standard deviation, a measure of how much investors can expect prices in the asset to vary from year-to-year.

That means investors could just as easily see their investments in stocks rise or fall by 20% in any given year.

Understand that this is only the previous ten years and there’s no guarantee that the same risk/return history will hold up in the future. Commodities have had a very tough time over the past decade while real estate has experienced its most volatile period in history.

asset class risk and returnsInstead, what’s more important is the relative risk and return of the different asset classes. Understand that bonds offer much lower risk and a stable return while other investments offer the potential for higher returns but also at higher levels of risk.

Your decision to invest in asset classes and how much in each is called your asset allocation. Because of these differences in risk and return in the assets, your allocation in each or the portion of your overall wealth in each, is going to play a huge factor in your overall risk and return.

In fact, studies have found that the amount you decide to invest in each asset class accounts for more than 90% of the difference in your returns. That’s how much you should expect to see your nest egg’s value rise or fall in any given year.

So why not just invest all your money in real estate or alternative investments? They offered the highest returns over the last decade.

First, because of the risk involved and your tolerance for risk. If you saw your nest egg plunge by 38% in a year and were the type of person that doesn’t want much risk in your investments, you would be pulling your hair out. You’d get no sleep and would probably end up panic-selling your investments. You wouldn’t get that 16% annualized return because you would end up buying-high and selling-low.

The other reason why you want to think about your asset allocation is one of the miracles of investment management, a little thing called diversification.

Through diversification, you can actually get a higher return than most of the asset classes but at a much lower risk. It’s like being able to eat your cake and not have to wash the dishes!

Diversification is the idea that investing in two or more different asset classes will smooth out your risks and give you more stable returns. For example, we know that stocks do terribly when the economy starts to tumble into recession. Bonds, on the other hand, may do very well because companies will still be making their regular payments and lower interest rates actually increase the value of fixed-income investments.

When the economy starts to rebound, stocks zoom higher on faster sales growth for companies. Bond returns might lag though because of higher interest rates and weak demand by investors.

If you were to invest in only one of these asset classes, you’d face a very tough year about every three to seven years. In those bad years, you run the risk of making bad investing decisions like selling investments or just generally stressing out about reaching your financial goals.

But if you invested in both stocks and bonds, you get the upside of stocks when the economy is growing and the protection of bonds when the market falls apart. If you invested equally in stocks and bonds, you would have gotten a 6.6% return with just 12% risk over the last decade.

That’s nearly the return of investing in stocks but with about half the risk!

And the benefits of diversification get even better when you add other assets to your investments.

How to determine how much you need in different assets

So let’s recap quickly because I know this is a lot of information but it’s so important to get these basic investing concepts down before you try picking individual investments.

  • Investing starts with your long-term goals, how much you need for retirement and other spending needs.
  • The price of these goals is used to find the average return you need along with how much you can save and how long you have to retirement.
  • Your risk tolerance is how much stress you’re caused by varying levels in your investments. Investing with too much risk will cause bad investor behaviors and will lose money so it’s important to know your investor personality-type.
  • Assets are groups of investments that share similar characteristics like risk, return, investing costs and how easy it is to buy or sell. There are five asset classes; stocks, bonds, real estate, commodities and alternative assets.
  • Putting your money to work in investments across multiple asset classes, for example in stocks and bonds, can help you smooth out the ups-and-downs of the markets but still get high returns.

If your asset allocation is so important, how do you decide how much to invest in stocks, bonds or the other assets?

Most advisors will tell you that an investment directly in commodities isn’t necessary and I would agree. The track record for commodity returns hasn’t been good and you get enough diversification by investing in other assets. You can still invest in companies that produce commodities like miners and oil explorers because your investment is an ownership of the company’s profits, not just in the commodity itself.

I’d also say that investing in alternative assets isn’t altogether necessary for most investors. In fact, other than through equity crowdfunding which we talk about in another course in the series, you might not be able to invest in this asset class. That’s because the government says you need to have at least $1 million or a certain level of income just to participate in alternative investments like private equity, venture capital and hedge funds.

So we will be talking about investing in three assets; stocks, bonds and real estate.

How much you invest in each group is going to go back to your need for return and risk tolerance we’ve talked so much about.

Real estate and stocks provide the potential for higher returns but at higher levels of risk. Bonds offer lower risk but also lower returns. So the overall question is how much return do you need from your investments and how much risk are you willing and able to take?

If you have $100 to invest, how much of it do you want to invest in stocks, bonds and real estate? How do you decide which is better for example $60 in stocks, $20 in bonds and $20 in real estate versus $30 in stocks, $40 in bonds and $30 in real estate?

We’ll look at the specific numbers you might consider investing in each asset class throughout your life in the follow-up articles to the series. Here are some things to consider in making your decision.

  • How many years do you have left until your financial goal? Is it enough time for stocks to bounce back from a crash if one happened tomorrow?
  • What is the mix of investments that will meet your need for return? You find this by multiplying the percentage of your money in each asset by the asset’s return, i.e. a 40%/30%/30% portfolio in bonds,stocks and real estate would be 0.40*.054 plus 0.30*0.077 plus 0.30*.083 or an expected return of 6.96% on your total portfolio. I’ll highlight different example portfolios and the expected return in the follow-on articles.
  • Does your tolerance for risk mean you should weight your investments more to safer bonds or to more risk and higher return in stocks and real estate?

Setting up your initial investments in assets and within assets is 90% of investing but your needs will change as you get older. Your financial goals may not change but the answers to nearly every other question we answered earlier will change as the years pass.

  • Your investment wealth will increase and you may be able to invest more each year so your need for return on investments will decrease. This will allow you to take less risk but still meet your goals.
  • The time you have to retirement will shorten which will mean your investments have less time to recover after big market drops. That means less tolerance for risk and more money in safer investments.
  • You may need to start living off your investments which will mean more money in cash flow-producing bonds or real estate.
  • Life events like getting married, having kids or even changing jobs can cause you to rethink how much risk you want in your investments.

How to adjust your asset allocation over the years is called portfolio management. You won’t have to do anything but make your regular deposits and invest in most years but every three-to-five years, you’ll need to revisit the process to make changes.

This should all be reinforcing the idea that investing, meeting your life-long financial goals, is less about what you invest in and more about how you invest. Picking individual investments is a minor, almost insignificant, part of your overall investing plan.

The Smarter Approach to Market Timing

Once you’ve got your investments, how do you know when to sell? We’re hounded daily about whether a specific stock will rise or fall and analysts make their best guess every year about which asset class will outperform the others.

Should you listen? Should you just keep investing across your asset classes and never worry about selling investments?

That’s the opinion of the buy-and-hold investors. Some argue that you should never sell an investment until you’re ready to retire. Even some of the best analysts on Wall Street have a 50/50 record of telling when a stock will fall so it really makes no sense to try timing the market by selling stocks.

Other investors argue that you can boost your returns by carefully following the market and news around specific stocks. These investors may keep their money invested in the asset classes but they are constantly changing specific investments, selling one stock to buy another.

To which group of investors should you listen? Buying and selling frequently increases your costs but holding onto stocks forever doesn’t seem to make much sense in light of the two market crashes since 2000.

There’s got to be a better alternative than sitting around waiting for the next stock market crash to obliterate 50% of your investment.

There is a way to protect your portfolio and earn solid returns. As we’ve seen already, investing and reaching your financial goals isn’t about buying specific investments but about investing in those groups of investments, asset classes. This is going to be true in selling investments as well.

We’ve already talked a little about how your asset allocation will change as you get older. This usually means you’ll want to put more money in bonds rather than stocks for less risk. When you go to do this, selling some of your stocks and shifting the money into bond investments, it’s called portfolio rebalancing.

Portfolio rebalancing isn’t just for when your asset allocation needs change. You can also rebalance your assets when the values in your portfolio have moved away from your target.

Let’s look at an example.

  • Let’s say you start with 50% in stocks, 30% in bonds and 20% of your money invested in real estate. You’ve decided that this allocation provides for the return you need to meet your goals but at the risk level you’re comfortable taking.
  • A few years pass and stocks have done really well. You started with $500 of your $1,000 portfolio in stocks but now they are worth $900 on a total portfolio of $1,200 in the three asset classes. That means stocks now account for 75% of your total wealth, i.e. $900/$1,200 portfolio.
  • If you left it as-is, a stock market crash could wipe out your portfolio. The new allocation of 75% stocks and 25% in bonds and real estate no longer matches your needs. Even if you still want 50% of your money in stocks, this would mean selling stocks and buying more investments in the other two asset classes.

This type of portfolio rebalancing is a great way to ‘buy low and sell high’ because you are selling the assets that have done really well, growing beyond your allocation, and buying those that have lagged.

This kind of rebalancing also doesn’t rely on your ability to ‘time the market’ and predict where stocks or other asset prices will go next. You are merely keeping up with your targets for asset allocation, adjusting when necessary.

We’ll use this ‘percentage of target’ rebalancing strategy throughout the series to adjust investments when your asset allocation targets change as you get older but you can also use it regularly to get your portfolio back to its targets.

This is how portfolio rebalancing as a percentage of asset allocation works:

  • You set your targets for how much you want to have invested in the three assets; stocks, bonds and real estate. Let’s say you are a young investor with a high-risk tolerance and initially targeting 65%/20%/15% in stocks, bonds and real estate.
  • You set bands around your asset allocation targets; i.e. you will allow your investments in stocks to fall to 50% or rise to 80% of your portfolio before rebalancing. This keeps you from having to watch your investments and selling frequently. You only need to sell one asset to buy another when the value has moved outside your band.
  • If the value of your stocks falls below 50% of your total wealth, you would sell some other assets, either bonds or real estate, and buy more stocks. If the value of your stocks rises above 80% of your total wealth, you would sell some stocks to buy more of the other assets.

Another advantage of this type of rebalancing is that you don’t have to sit by the computer watching your investments. Your investment in each asset class isn’t going to surge or fall so much overnight. You’ll check the values maybe once ever few months or even annually to make sure they haven’t moved outside your band limits from the target.

Avoiding Bad Investor Behaviors in Your Retirement Plan

If you follow this series on life-long investing, you shouldn’t have to worry about bad investing behaviors. I wanted to include the section though just as a heads-up on some of the worst ways our brains trick us into making bad investment decisions.

Our brains are hard-wired for certain behaviors like making assumptions and the fear of loss. These behaviors can be a good thing because they help us make sense of a world with a million interactions coming at us in a second and they help us to avoid dangerous situations.

These behaviors can also cause us to make bad decisions though, especially when it comes to investing.

The natural assumptions we make and that knee-jerk reaction to loss don’t work so well when it comes to investing in the stock market. Let’s look at the three most common investor behaviors that lose money and how to avoid them.

Familiarity – We subconsciously favor things that are familiar to us and similar to ourselves. The trait helped people bond together in societies and avoid unknown dangers. When applied to investing, it can give you a false sense of security and leave you horribly exposed to loss.

Stocks of non-U.S. companies make up 51% of the total world investment index but the average American investor holds just 27% of their portfolio in foreign stocks. This makes them over-exposed to what happens in the U.S. economy and misses out on growth opportunities in other countries.

Another effect of familiarity is that many people hold a large share of stock in the company for which they work. It’s fine to own company stock but owning more than 5% of your portfolio sets you up for a very harsh reality. If the company comes on hard times, you could lose your job at the same time your stock portfolio is crashing.

Just because you buy a company’s products, work there or are familiar with the brand doesn’t make it a good investment. Spread your total investment across many sectors and industries and in stocks of foreign countries as well.

Overconfidence – We tend to think of our successes as coming from skill but our losses as something we could not control. This is great for building self-confidence but horrible for investing.

Many investors jump into a few risky stocks without any analysis or thought. When a few of those stocks do well, the investor starts thinking they are a natural-born stock-picker and puts even more money into this gambling behavior. They fixate on TV advice and expect double-digit returns overnight.

Of course, it isn’t long before they’ve lost all their money in risky stocks that shouldn’t have been in their portfolio anyway.

Make your investments based on your goals and risk tolerance, not on what some TV analyst said was going to explode overnight. Resist the urge to think you know more than the millions of other investors.

Loss aversion is probably the worst investor behavior and can cost thousands of dollars. I know this is one I’ve struggled with in the past.

We feel loss much more deeply than winning and subconsciously avoid it at all costs. This has helped people avoid dangerous situations and unnecessary risks.

In investing, people tend to sell their winners quickly and hold on to losing investments. They sell stocks that have gained because they fear that the stock price will come back down and their return will turn into a loss. Investors hold on to stocks with falling prices and even put more money in it in the hopes that they be able to break even.

Don’t make your investment decisions based on prices. We’ve already seen how to use rebalancing to sell some of the assets that have increased in value and buy those that have lagged in performance. You’re not selling a specific stock just because it has increased or decreased in price, you’re selling a group of stocks in your portfolio because the market has increased and you need to rebalance your wealth.

Follow a long-term plan, matching your investments with your life goals and you shouldn’t have to worry much about these bad investor behaviors. In the following articles, we’ll look at how to put together your portfolio of stocks, bonds and real estate depending on your investor type. We’ll talk about how to make the long-term decisions and how not to fall for short-term fears in the market.

Understanding Your Investor Type

Through the rest of the life-long investing series, we’ll be talking about how to plan your investments according to your investor type. It’s going to be much more hands-on and practical because you’ll be able to match your needs and personality with one of three different hypothetical investors.

getting started life-long investing planI’ll describe these three example investor types here and then we’ll look at how they would invest in each decade of their life to meet long-term investing goals.

The three investor-type examples are going to be set up according to risk tolerance and need for return, much like you will start your investing plan. As you follow along with the three investors through the rest of the series, getting an idea how they would invest through their life, understand that you may not always be in the same investor type.

As we talked about in how your investing plan should change as you age, your ability and willingness for risky investments will change over time. Your wealth will grow and you will also be able to accept a lower return with less risky investments.

Conservative Cody

Our first example investor is Conservative Cody. He is 50 years old and has a portfolio of $175,000 and some savings. Cody has never liked taking risks and gets knots in his stomach thinking about losing money. Every time the stock market stumbles, all Cody can think about is how many days he has to work just to make up for the money he lost. He plans on working until age 67 and estimates he needs a return of 5.5% annually to meet his goal.

Things that might make you a Conservative Cody:

  • Little job stability – if your company or industry lays off workers frequently, you may not want a lot of risk in your investments. Losing your job in a recession, the same time your investments are sinking, could cause overwhelming stress.
  • Fewer than 10 years to retirement or the time when you need to withdraw investments for your goals. As you get closer to depending on your money, your priority shifts to protecting it rather than faster growth.
  • Your personality will play a big part in your investor type. You may be able to tolerate risk but if you get stressed out easy about money and losses then you should take a more conservative approach.

Average Amanda

Amanda is in her late 30s and has a stable job. She hasn’t saved much but is ready to start investing and motivated to reach her life-long goals. Her investments total just $10,000 including a company 401k but she is saving every month and getting a company match. She’s aiming for that $1 million retirement when she turns 65 and estimates she needs a return of 6.5% to get there.

Things that might make you an Average Amanda:

  • More than 15 years but less than 30 years to retirement. You have plenty of time to let your portfolio recover from losses but you are starting to worry about how much time you have left.
  • You may not have much saved yet but you’ve started and a moderate return of around 6% annually will get you to your goals.
  • You have some stretch goals in your financial plans, things that you’d like to do but it wouldn’t be a big deal if you missed them. That gives you some leeway in the amount you need for retirement.
  • You don’t mind taking some risks but would rather not have to worry too much about your money.

Risky Rebecca

Risky Rebecca is a younger investor in her 20s. She has just started saving but has 40 years plus to go before retirement. She’s saving what she can each month and committed to saving more as she gets older and her income increases. Rebecca doesn’t get stressed out over anything and loves thrill-seeking like parachuting and risky sports. She’s aiming for a 7.5% annual return to grow her portfolio while she can handle the risk before she needs to start dialing it back later in life.

Things that might make you a Risky Rebecca:

  • More than 30 years left to retirement.
  • A large portfolio of investments and flexible goals in retirement. If your current investments are large enough to take a loss and still provide for retirement expenses then you can take more risk. If your goals are flexible, i.e. you could accept less income and still be happy, then you are able to take more risk.
  • A stable job with little or no risk of income loss. Workers in public service or protected by union contracts face less risk of job loss and may get better severance packages. This gives them financial stability and they can take more risk with their investments.
  • As with the other investor types, your personality will also play a role. If you don’t stress out easily and don’t mind if your wealth fluctuates a lot then you will be able to take more risk without worry.

As you’re relating your own personality with one of the example investor types, remember that age plays a part but doesn’t necessarily count for everything. Older investors with less time to retirement tend to have less ability to tolerate risk in their portfolio. They have less time to recover from a stock market crash and generally don’t want to see large swings in their portfolio value.

That doesn’t mean a younger investor can’t be a Conservative Cody though. Young investors might be ABLE to tolerate big swings in their wealth but might not want to take on risk. There is nothing wrong with preferring the slow-and-steady and wanting less risk in your investments.

By the same token, older investors can take on more risk than average if it fits with their personality and ability. If you have a very large portfolio so that even a large loss will not jeopardize your ability to meet retirement expenses then you are able to tolerate more risk.

Following these three investor types through the series will help give you ideas on how to invest your money but it’s very important to go through the steps we’ve talked about in this article. Don’t just assume you are a Conservative Cody or a Risky Rebecca.

Create your own financial goals, calculate your return need and understand your tolerance for risk. This will make investing as personal as possible and you’ll be able to customize a plan and stay motivated to reach your goals.

Life-Long Investing Summary and Action Steps

It’s been a long article and you may be tempted to just skim over some of the information. It’s easy to just assume you need a certain amount to retire or that you have an average risk tolerance.

Don’t assume anything! Take the time to think through each of the steps in the article. Create your investing goals, get a solid idea of how much you need in retirement. Get familiar with investment calculators to estimate the return you need and understand how much risk you can handle before it causes you stress.

These steps are going to be critical in your life-long investing journey. They are like getting everything ready for a long road trip; filling up the car, packing the clothes you’ll need and making sure you turned off the oven. Fail to prepare for your road trip and you’ll be stranded, naked and worried that your house is burning down.

Fail to prepare for your long-term investing plan and the consequences could be even worse. Nearly 20 million people rely on social security for all their income. With an average benefit of just $1,360 a month, that’s just $16,320 a year for expenses. That might be enough for rent and groceries…if you stretch it.

  • Define your life-long goals, what you want to do in retirement and what are the big expenses you’ll have later in life. Visualize your future self and make these goals real.
  • Estimate your expenses starting from current living expenses and adding in any bucket-list goals. Don’t just do this in your head. Write it out and think through it.
  • Use an investment calculator to find the average annual return you need to meet your retirement goal. Play around changing the years to retirement, regular savings amount and return to aim for between 4% to 7% return while still meeting your target.
  • Take an investing risk tolerance questionnaire to find your ability and willingness for volatility. Understand that taking too much risk in investing, if it causes you stress, will only lead to bad investor behaviors and losses.
  • Understand the differences in asset classes and why you need to invest across stocks, bonds and real estate. Combining investment in these three will give you a higher total return with less risk than just investing in one. You’ll invest different amounts in each according to your investor type but you can’t afford to neglect any asset.
  • Think through your investor type and resolve to invest accordingly. Follow the rest of the series for ideas on how to invest throughout your life to meet your goals.

Reaching your life-long investing goals isn’t something you can do overnight or by reading an investing article in an hour. You may have to reread through some of the ideas above, making notes and thinking through how it applies to your situation. Take your time because these first steps of getting started on your investing plan are critical to your success.


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