By the time you’re in your 30s and 40s, you’ve probably started to get serious about your savings. Now it’s time to figure out the best way to invest that money for a more secure future. The right blend of investments can dramatically boost the odds of reaching your retirement goals. Smart portfolio diversification can also help you reduce investment risk to a level you can live with.
“The most important thing that young investors can do is to get used to saving money in a constant, year-in, year-out way,” says Thomas Schneeweis, emeritus professor of finance at the University of Massachusetts-Amherst. “Once you’ve done that, you can begin to think about the best way to invest those savings, based on your individual situation.”
Focus on growth. People in their 30s and 40s can benefit by accepting a bit more risk in their portfolios than older investors. If you expect to have a few decades of income earning (and saving) ahead of you, you have time to ride out dips in the market (and profit from rises). Plus, a more aggressive asset allocation increases the likelihood that your portfolio earnings will outpace inflation, which might otherwise eat into your savings. Many financial experts recommend maximizing your portfolio’s growth potential by keeping 70% to 80% of your money in stocks during this stage of your life.
Keep it diverse. Don’t put all your nest eggs in one basket. Broadly speaking, stock and bond prices tend to move in opposite directions. Splitting your investments over a variety of asset types—stocks, bonds, real estate and cash, for example—can smooth out the ups and downs of the markets. Studies suggest that a well-diversified portfolio might even improve your investment returns compared to any single type of investment.
Think about risk. While it’s a smart move for young investors to prioritize growth, you also need to manage your own appetite for risk. Some people have a harder time coping with the inevitable (and usually short-term) declines in the stock market. If you’re the type to lose sleep over financial fluctuations, consider putting more of your money in insured certificates of deposit, high quality bonds and U.S. Treasury instruments. But know that you’ll probably have to save more to make up for the slower growth you can expect from these conservative investments.
If you’re considering a major lifestyle change in the next few years—changing jobs or signing on with a start-up, for example— factor that into your risk profile as well. “If your earning stream is going to be a bit more volatile, you may need to invest more conservatively to balance it out,” says Schneeweis
Outsource your portfolio. If the idea of building and maintaining a portfolio sounds like a chore, consider a target-date fund. These investments are set up to automatically become more conservative as the target date approaches. In other words, these funds let you outsource the task of fine-tuning your investment allocation as you approach retirement. For some people, having a trusted professional take over this task is more valuable than the control gained by managing a portfolio by yourself.