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’re more comfortable with.
“The most important thing that younger investors can do is to get used to saving money in a constant, year-in, year-out way,” explains 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 from accepting a bit more risk in their portfolios than older investors. If you still have two or three decades of income ahead of you, you’ve got time to ride out dips in the market (and profit from rises). A more aggressive asset allocation also improves the likelihood that your portfolio earnings will outpace inflation, which could otherwise eat into your savings. Financial experts typically recommend maximizing your portfolio’s growth potential by keeping about 70% to 80% of your money in stocks during this stage of your life.
Keep it diverse.
Diversification helps to reduce investment risk. 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 help to smooth out the ups and downs of the market. Studies suggest that a well-diversified portfolio might even improve your investment returns over time, compared to concentrating on a 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 inevitable (but 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 into 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 starting your own business, 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,” cautions Schneeweis
Outsource your portfolio.
Does the idea of building and maintaining a portfolio sound like a chore? If so, consider investing in a target-date fund. These funds are set up to automatically become more conservative as the target date approaches. In other words, they let you outsource the task of fine-tuning your investment allocation as you near retirement. For some people, having a trusted professional take on this task is far more valuable than any control gained by doing it yourself.