Simple, Easy Investing Using an Age-Based Portfolio Strategy
Everything changes as you get older. And while few of us look forward to the downsides of aging – the joys of belly fat, wrinkles, thinning hair, and so on – one of the big upsides of getting older is gaining the wisdom and experience you just can’t acquire any other way.
Your investment portfolio gets older, too. But unlike our waistlines, we actually want our portfolio to grow over time. And taking an age-based strategy with your portfolio is a simple approach to managing your investments effectively over the long-term.
Start Early and Keep the Ball Rolling
The secret of investing isn’t much of a secret at all – start early and invest regularly. The earlier you get started, the more time your money has to grow. Ideally, as soon as you have a regular income, you should try to reserve at least 10 percent of each paycheck toward savings and investments (and taking full advantage of your employer’s 401(k) match, if available, is a no-brainer). If you can’t manage to do that, you may be living beyond your means.
Have I Got a Deal for You!
OK, let’s assume you’re living within your means, regularly contributing to a savings account and you’ve accumulated a couple thousand dollars that you’re ready to invest. As soon as you have even the smallest pile of money, the salespeople start to come out of the woodwork – and all of them have the best investment for your personal situation. The lowest fees, highest return, lowest risk and best customer service. And if you act now you get a free mouse pad!
Be very wary of the hype, especially coming from anyone with a commission riding on it. And contrary to what the experts will tell you, you can manage your portfolio yourself. One of the easiest ways to do so is by taking an age-based portfolio approach. Simply put, this strategy associates your age bracket with a target asset allocation (proportion of stocks, bonds and cash). Let’s take a closer look.
I’m a 20-Something, Where Do I Put My Money?
For those of you who don’t wear watches, who prefer texting to email and who think of Clint Eastwood as a kindly old movie director, you’re probably a 20-something and stocks should make up the majority of your portfolio. Stocks are considered (especially in the short-term with market ups and downs) higher risk investments than bonds or cash equivalents (like savings accounts, CDs and 30-day Treasury bills). Over the long-term, though, stocks have historically outperformed all other investments. So if you’re in your 20s, a portfolio made up of mostly domestic stocks is a good place to start.
One warning: keep your stock investments diversified by buying into mutual funds or exchange-traded funds (where the price reflects a large basket of stocks) instead of just picking individual stocks to invest in. Unless you’re looking into a career as a stockbroker, I’m guessing you don’t want to spend most of your free time analyzing balance sheets, price-earnings ratios and future outlooks of dozens of companies.
I’m in My 30s, What About Me?
If you wear a watch as an accessory, you don’t like to text as much as you used to and you’re vaguely aware Clint Eastwood used to be an actor, you should begin to move your portfolio toward a mix of stocks, bonds and cash equivalents – especially as you near the big 4-0. Always remember that the closer you get to retirement, the less short-term risk your portfolio should have. And since bonds and cash equivalents are less risky investments, as the years pass, the bond + cash proportion of your portfolio should grow over time. That said, though, in your 30s the majority of your portfolio should still be in stocks.
For the Over-40 Crowd
If you actually use a watch as a timekeeping device, you accept texting as an unfortunate part of life and you can remember when Clint Eastwood was Dirty Harry, most likely you’re in your 40s. Bonds and cash equivalents should now become a larger part of your portfolio, anywhere from 15 percent to 20 percent, depending on how much risk you want to take on.
Mid-Life and Retirement
If you feel naked without your watch, you think texting is a waste of time and you remember when Clint Eastwood was a hunky TV star on Rawhide, then retirement is probably just around the corner. Many investment advisors recommend a 50/50 portfolio rule of thumb – meaning, by the time you reach retirement age, stocks should be about 50 percent of your portfolio with bonds and cash making up the other half.
The Caveats – One Size Does Not Fit All
Below is a table summarizing an age-based investment portfolio approach.
| Years to Retirement | Stocks | Bonds + Cash |
| 25 years or more | 90% | 10% |
| 20 years | 85% | 15% |
| 15 years | 75% | 25% |
| 10 years | 65% | 35% |
| 5 years | 60% | 40% |
| At retirement age | 50% | 50% |
| 5 years after retirement | 35% | 65% |
| 10 years after retirement | 30% | 70% |
A few things to keep in mind about taking an age-based approach to investing:
- Everyone’s risk tolerance is different. If the short-term swings of the market make you queasy, you may prefer to have a higher proportion of safer investments (bonds and cash equivalents) in your portfolio. The tradeoff is a potentially lower return over the long-term.
- It’s a long-term strategy. An age-based approach assumes you don’t jump in and out of investments like a day trader. It works best when you save and invest on a regular basis and re-balance your portfolio only when you need to adjust your asset mix to meet your target allocation.
- Diversification. We’ve discussed a very basic, boiled-down version of a portfolio, using broad references to stocks and bonds and cash equivalents. In reality, there are countless stock and bond investing options out there. Do your homework and make sure your investments maintain a good level of diversification, including stocks of all capitalization levels (small, mid and large) and a variety of bonds (short-, mid- and long-term). And stay away from any bonds or bond funds below investment grade (let the speculators roll the dice with the junk bonds).
There are few things as important to you and your family’s well-being as the active care and maintenance of your investment portfolio. And with regular, consistent saving and investing, an age-based strategy offers a simple, practical way to manage your money over the long haul.
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