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Different Investment Strategies For Different Life Stages

Different Investment Strategies For Different Life Stages

Different investment strategies at different life stages

the man from young to old

A number of people have asked me to share some different investment strategies for different life stages. What I’ll do is highlight the various investment strategies I think make sense for most people, discuss a couple more alternative investment strategies, and round up what strategy I think is most appropriate by life stage.

We all know that step one to building financial wealth starts with saving. What really widens the wealth gap over the years is HOW one invests. Before investing in anything, I encourage everyone to tell themselves five things out loud.

1) I will lose money.

2) I will feel like a complete idiot when I lose money.

3) Nothing goes up forever.

4) There are plenty of exogenous variables outside of my control.

5) No risk, no reward.

Now that you’re mentally set to invest your hard-earned savings in the stock market where one change in government law, a corrupt CEO, a terrorist attack, a natural disaster, or a declaration of war could instantly wipe out half your gains, let’s begin!

Various Investment Strategies To Consider

1) Indexing. A simple, low-cost strategy where you pick a particular stock index to purchase through an ETF or mutual fund. The most common US index to follow is the S&P 500 index. You can buy the ETF, SPY or buy a Vanguard S&P 500 Index fund, VFINX. Given its been shown that active fund management can’t outperform their index benchmarks over the long-term, saving on fees through an ETF or index fund is a prudent way to go for everyone. Wealthfront, the leading digital wealth manager is the best at investing idle cash at a low cost. The first $10,000 is free to manage, and it’s only 0.25% for every dollar afterward.

2) Smart Indexing. The S&P 500 is a market-cap weighted index. In other words, if we go through a three year bull market in technology, technology stocks will account for a greater weighting of the index than other sectors. This can be good for momentum investors, or bad as the tech sector tumbled by 80% in 2000, and the financial sector corrected by a similar amount in 2008-2009. Smart Indexing aims to keep all sector weightings equal, through constant rebalancing so that no one sector can dominate. Personal Capital is the leading hybrid digital wealth advisor who uses human advisors as well as technology to help manage your money. They are proponents of Smart Indexing. You can sign up to use all their financial tools for free if you don’t want to pay ~0.89% for them to manage your money.

3) Target Date Funds. Target date funds are a smart invention by the money management industry that allows retail customers to allocate all their money into one specific target-date fund and forget about things until they reach that target date for retirement. For example, you could be 40 years old and have a target date to retire in 20 years. You’d therefore choose the XYZ 2034 Target Date Fund. The fund will already be diversified for you in terms of stocks and bonds. It’s up to you to read the fund prospectus and understand the allocations, holdings, and decision making process. You should also examine the fund for fees, as they will be much higher than index funds.

4) Actively Managed Funds. As a whole, actively managed funds underperform index funds. That said, there will certainly be long term winners who do outperform. Otherwise, there wouldn’t be titans in the money management industry like Capital, Fidelity, Wellington, Dodge & Cox, Oakmark, Artisan, and so forth. I used to cover many of these fund managers in my previous life-time, and am friends with many of them now. What you need to watch out for is Portfolio Manager turnover. You’re really betting on the money management skills of the portfolio manager and his/her analysts. Many of these large money management firms will lose their PMs and analysts to competitors, and try to utilize their existing brand to prevent defection. To see how actively managed funds are rated, pick up your latest Money Magazine issue and look to the back, or check out MorningStar, whose business is to rate all different types of funds for performance.

5) Combination Index + Actively Managed. In general, you shouldn’t really be thinking about how to beat the markets, because it’ll cause you a lot of stress and you’ll probably lose in the long run. What you should be thinking about is market exposure, since we can get a good idea of future equity performance based off historical performance (6%-8%). Let’s say you are comfortable with a 100% equity exposed portfolio. You can consider allocating 70% of your portfolio in an Index fund, and allocate the rest of your money in your favorite actively managed funds. Many people will like this approach because people want to feel that they are making a positive difference with their investment choices.


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