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How to Pick the Best Investments for Your 40s

Picking the best investments for your 40s will mean slowly shifting to safer and inflation-protected investments

Investing in your 40s is a lot like investing in your 30s…and 20s but there is one important idea that needs to take hold over your first few decades investing. The best investments and the types of stocks you buy might not change much but the important point is that they do change, gradually. Getting into the habit of slowly changing your portfolio allocation according to your age will pay off big time later in your 50s and 60s.

This is the fourth post in our best investments by age series. The series looks at how to change your investments according to your age and other factors to best meet your retirement goals. Too many investors neglect the idea of investing by age and end up falling victim to a stock market crash just as they need their money to retire.

Investing by age will help you take advantage of decades of higher returns in the stock market while shifting your portfolio risk and making sure your money is there when you need it.

Check out all the posts in the investing by age series:

How Investing in Your 40s Changes

Investing in your 40s may start off looking a lot like the investments you bought over the prior two decades but should look very much different by the time you approach your 50s.

Through your 40s you still have decades left to retirement and your portfolio can withstand a few stock market hiccups. Since 1956 there have been 11 bull markets where stocks soared more than 20% and about 11 bear markets where stocks tumbled 15% or more. On average, it’s taken about 14 months for stocks to reach their lows when investors got worried and 51 months to reach the stock market high when things were rosy.

That means even if you invest at exactly the wrong time, when stocks are at their most expensive and before a bear market, you would only need to wait an average of about five years for your investments to recover and gain on the next run.

That long time horizon to when you need to start relying on your investments for living expenses means your 40s will still see most of your money in stocks and ‘Other Assets’ that can provide higher returns on a little more risk.

investing in your 40s

In fact, for the model asset allocation, I didn’t change the stocks or bonds allocation from the best investments for your 30s chart though we did take some money out of Other Assets to put into Real Estate. I like real estate as protection against inflation, something you need to start thinking about more and more as you approach retirement and need to depend on a fixed income that may not adjust for higher prices.

Working off of historical averages for the different asset classes in the chart, the allocation would still provide an annual return around 6% which is the same as the allocation for the 30s’ investment portfolio.

By the end of your 40s though you might have just half of your assets in stocks, in favor of more in bonds and real estate. Heading into your 50s is when you should really start to see changes in your investments. If you are planning on early retirement, you might not have time to rebound from a stock market crash and some investments in Other Assets might take too long to mature.

investing in your 50s

How to Customize your Investing by Age

Time isn’t the only factor in finding the best investments by age and you should customize your investments according to your own unique circumstances. This all comes from a previous post on making a personal investment plan to fit your needs where more detail is available on five specific factors to investing by age.

best investments 40s investingOne of the biggest factors you need to consider is the size of your portfolio relative to your investing goals. If you already have a sizeable portfolio that only needs to grow at a modest 4% annually to reach the amount you need in retirement, you don’t need to take nearly as much risk as most investors. You can take some money out of stocks in favor of bonds and real estate and not have to worry about stock market crashes.

Conversely, if you have a smaller portfolio now and need a higher return, you might need to keep a little more in stocks to reach your investing goals. If you’re looking at needing more than 60% of your portfolio in stocks into your 60s though, you might want to consider lowering your goals a little rather than take on more risk. Getting caught in the next stock market crash just before retirement is going to decimate your portfolio if you have too much in stocks.

Your own risk tolerance will determine how much you have in stocks as well. If you’re someone that freaks out when stocks start to tumble and panic-selling causes you to miss out on the eventual rebound then you’ll want more in bonds than the average investor. All the time in the world won’t help you if you constantly buy-high and sell-low out of bad investor behaviors.

Check out these 10 questions to find your risk tolerance and how you should invest.

Other factors like your tax rate and any needs for money before you retire (i.e. education) will also affect your investing plan. While there’s no rule for how much you should have in stocks, bonds and other assets, the investing by age series can act as a good benchmark from which to start. Check out the different portfolio allocations and then customize them according to your own financial needs.

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