The basics of asset allocation and diversification
As you consider an investment strategy for the different stages of your life, it’s important to grasp the concept of asset allocation. Asset allocation allows you to diversify your investments in a variety of categories, such as stocks, bonds and real estate. According to an article by G. Brian Davis for Money Crashers, you can diversify even more within each category. For example, a portfolio of stocks might include mutual funds, U.S. and international stocks, and index funds that specialize in specific industry sectors or company sizes.
Diversification is important because it allows you to allocate your assets among investment types with a variety of risk and return levels. Instead of concentrating on one type of investment that might expose you to too much risk or hamper your portfolio’s growth, you can invest in multiple categories tailored to your life stage and financial goals.
Investing in your 20s
If you’re in your 20s, it’s crucial to prioritize investing. Thanks to the powers of compounding interest, getting started now gives you a major advantage as you build wealth and save for retirement — even if you can’t afford to invest a lot of money right away. If you have access to a 401(k) plan through work, contribute as much as you can, especially if your company offers matching funds. If you don’t have a 401(k) or if you want to invest even more, you could also open a Roth IRA.
Since you’re still several decades away from retirement, you can afford to invest more aggressively. Writing for Investopedia, Zina Kumoki suggests an allocation of 80 to 90 percent stocks and 10 to 20 percent bonds. If you have a 401(k) plan, you might be able to invest in a target-date fund that automatically rebalances your allocations and adjusts your investment risk as you age.
Investing in your 30s and 40s
Your 30s and 40s are prime decades for investing, especially if you’re experiencing career and income growth. It’s also an opportune time to start playing catch-up if you’ve neglected investing until now. In an article for The Balance, Barbara Friedberg suggests continuing an aggressive approach in these years, doing everything you can to max out 401(k) or Roth IRA contributions. As you move into your 40s, however, she does recommend shifting your asset allocation a bit more toward lower-risk bonds.
During these years, you’re also likely to have more pressing financial priorities that need to be balanced with investing — like paying off debt or saving for your children’s education. Consider seeking the counsel of a financial advisor to help you set goals and plan your next moves.
Investing in your 50s and 60s
As you draw closer to age 65 and retirement, consider an investment strategy that combines more conservative asset allocation with an urgent focus on saving. Cutting back on risk helps ensure that the funds you’ve worked so hard to build up will be there for you during your retirement. Meanwhile, you can put even more money toward those years. If you’re 50 or older, Kumoki notes that the IRS allows you to increase your maximum annual 401(k) contribution from $19,500 to $26,000 and increase your maximum IRA contribution from $6,000 to $7,000.
No matter where you are in life, it’s imperative to invest wisely for retirement. As you age, make sure you’re maintaining a flexible approach to investment strategy so you can make the most of your hard-earned dollars.