|
Independent Investor May 2008 Investing for the Times of Your Life Wherever you are in your financial life cycle—starting a career, getting married, buying a home, raising a family, funding a child’s education or planning for a comfortable retirement—to be successful, you need to develop and maintain a disciplined approach to saving. Once a regular savings routine has been established, the next step is to decide how to invest the money you are saving. This decision will depend on many factors, including the intended use for the money, the time frame for when you’ll need the money and your comfort level with investment risk. Time and Risk Tolerance All investing involves a certain amount of risk. How well you tolerate price fluctuations in your investments will need to be balanced against your required rate of return to determine the amount of risk your investments should carry. An offsetting factor to risk is time. If you plan to hold an investment for a long time, you can probably tolerate more risk because you have the time to make up any losses you may experience early on. For a shorter-term investment, such as saving to buy a house, you probably want to take on less risk and have more liquidity in your investments. Sample Asset Allocations — Portfolio Risk Level | | Low | Moderate | Aggressive | | Stocks | 30% | 60% | 80% | | Bonds | 50% | 30% | 10% | | Cash | 20% | 10% | 10% | | Total | 100% | 100% | 100% | Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise and are subject to availability and change in price. Stock investing involves risk including loss of principal. This table illustrates hypothetical portfolio asset allocations for investors with the following risk profiles:
- Low Risk—retirees or those nearing retirement
- Moderate Risk—middle-aged investors
· Aggressive Risk—younger investors
These allocations are presented only as examples and are not intended as investment advice. Please consult a financial advisor if you have any questions about how these examples apply to your situation. Investing for Life’s Stages Although each individual’s attitude toward investing is different, most investors share some common situations throughout their lives. For instance, where you are in your life cycle certainly affects how you invest for retirement. Following are some major life events that most of us share, and some investment moves that you may want to consider: When you get your first “real” job: - Start a savings account to build a cash reserve.
- Start a retirement fund and make regular monthly contributions, no matter how small.
When you get a raise: - Increase your contribution to your company-sponsored retirement plan.
- Increase your cash reserves.
When you get married: - Determine your new investment contributions and allocations, taking into account your combined income and expenses.
When you want to buy your first house: - Invest some of your non-retirement savings in a short-term investment specifically for funding your down payment, closing and moving costs.
When you have a baby: - Increase your cash reserves.
- Increase your life insurance.
- Start a college fund.
When you change jobs: - Review your investment strategy and asset allocation to accommodate a new salary and a different benefits package.
- Consider your distribution options for your company’s retirement savings or pension plan. You may want to roll over money into a new plan or IRA (restrictions, limitations and fees may apply).
When your children have moved out of the house: - Boost your retirement savings contributions.
When you reach 55 years of age: - Review your retirement fund asset allocation to accommodate the shorter time frame for your investments.
- Continue saving for retirement.
When you retire: - Carefully study the options you may have for taking money from your company retirement plan. Discuss your alternatives with your financial consultant.
- Review your potential income after retirement and reallocate your investments to provide the income you need
Discipline and a Financial Consultant Can Help One of the most difficult things about investing is disciplining yourself to save an appropriate portion of your income regularly so that you can pursue your investment goals. And if you’re not fascinated with investing, it’s probably also hard to force yourself to review your financial situation and investment strategy on a regular basis. Establishing a relationship with a trusted financial advisor can go a long way toward helping you practice smart money management over your entire lifetime.
|
