Investing is the only way you can make your money grow. But it requires discipline. If you are not doing it systematically, chances are you fall short of achieving financial goals. So, what is the right way to invest? Financial advisors say that you need to plan an investment based on age, goals, and risk tolerance level. According to them, investment requirement isn’t static and needs finetuning depending on the investor’s age and basis that asset allocation for every age differs.
Now let’s see the right way to invest at different ages to decide the best course ahead based on where you are standing in your career path.
The famous Warren Buffet bought his first share at the age of 11, but most of us don’t begin until we reach the 20s. A survey discovered that only 39 percent of adults start building wealth for their retirement at twenty. Well, you have guessed the scenario pretty well. So, without further ado, let’s begin our discussion.
Start Early; Invest Often
The rule book of investment emphasises investing early and regularly. When you start investing at an early age, you are allowed more time in the market to grow your investment. Another advantage is, you can invest small amounts to get a big return at the end. If you start late, you will have to make a lump-sum investment for the same return. But when you invest regularly, it beats the market odds more successfully over a period of time.
The thumb rule to receive a good return from stock investment is to invest small and often.
The second golden rule suggests that you should diversify a portfolio with different asset-classes to generate a balanced return. It can contain stocks, ETFs, bonds, FDs, or other options based on your investor profile. However, based on your age, the allocation of each asset class in your portfolio will vary.
How To Invest In Every Age
When you are investing in the market, think of long-term investment. As we have seen recently, the market can be extremely unpredictable and cause a lot of panics. If you jump at every market turn, then you will end up hurting long-term financial goals. Ensure that you invest the sum that you aren’t going to need in the next five years. Market volatility is typical, but with time on your side, you can tide over these fluctuations.
Asset allocation is an important part of an investment. But what does it means? To put it simply, asset allocation means investing in different categories. There are three main classes of assets.
- Bonds and other fixed-income assets
- Cash and equivalent
Apart from the above broad categorisation, other asset-classes include
- derivatives (F&O)
Each asset class has a different risk-reward ratio that eventually impacts the return on investment. When investing, you would need to evaluate return from each asset class based on performance to determine the best combination for your portfolio.
Investing also depends on the overall economy and other factors. For example, when the economy is booming, investors feel more confident and invest in stocks. Conversely, in a volatile market, they will shift their investment to bond investment as stocks become riskier.
It’s essential to understand how different asset-classes perform in different market conditions to diversify your portfolio. So that when one asset tanks, the other survives. If you put all your money into one asset class, you may incur a huge loss when the economy takes a turn. To avoid that, put your eggs in different baskets.
When they start investing, most people ask us the question: how to invest at every age. to begin, there is a general recommendation for asset allocation based on your age. But this theory has both followers and critics. It suggests tha you subtract your current age from 100 and invest the resultant amount in stocks. Let’s see with an example. Suppose your age is 30, which means (100-30) or 70 percent of your investment should be stock investment.
This is a simplified rule, but it will give you a fair idea. It suggests that when you are young and have time by your side, go aggressively by investing more in the stock market. Take risks with money for more return. But if you are close to your retirement age, shift your investment to more secured, fixed interest traditional investment plans.
How To Invest In Your 20s
Financial advisors advise that you can take more risks at 20s as you have more time. You must go full throttle with investing in stocks, allocating 80-90 percent of your investment. Since you have more time to adjust to market change, you can invest more aggressively in fast-growing shares.
Investing During the 30s
When you are in your thirties, you still have time, but at the same time, you may have more responsibility and expenses. Hence, allot 70 percent of your investment in stocks and the remaining to bonds and other retirement funds. The Thirties is a great time to start planning for retirement.
Retirement Planning at the 40s
As you start planning for retirement in the 40s, the weight of fixed income-generating investment will grow in your portfolio. At this stage, you can have a balanced portfolio of 50-50 or 60:40 ratio of stocks and retirement schemes. Saving for your retirement should become a priority even when you think you can take the risk in the market.
However, we aren’t suggesting that you shouldn’t invest in stocks. You can still invest aggressively as long as you aren’t careless, which means picking the right shares with a solid track record.
As you progress close to your retirement, you need to adjust your portfolio and shift investment to more conservative saving plans. This time you should move your money more to low yielding income-generating funds from volatile stocks.
The Final Word
As they say, the best time to plant a tree was 20 years ago, and the next best time is now. The earlier you start, the more time you get to make your money grow. If you aren’t investing already, start doing it without further delay but make sure you select the best investment plan according to your age and risk profile.