Investing is a lifelong process. The sooner you start, the
better off you'll be in the long run. It's best to start saving and
investing as soon as you start earning money, even if it's only $10
a paycheck. The discipline and skills you learn will benefit you
for the rest of your life. But no matter how old you are when you
start thinking seriously about saving and investing, it's never too
late to begin.
The first part of a successful lifelong investment strategy is
disciplined savings habits. Regardless of whether you are saving
for retirement, a new house, or just that extravagant dining room
set, you will need to develop rigid savings habits. Regular
contributions to savings or investment accounts are often the most
productive; and if you can automate them, they are even easier.
Factors That Affect Your Investment Decisions
Once you begin saving on a regular basis, you'll soon have to
decide how to invest the money you are saving. Regardless of what
financial stage of life you are in, you will have to decide what
your needs are and how comfortable you are with risk.
Growth or Income
What do you need the money for? The answer to this question will
help determine whether you want to put your savings into investment
products that produce income for you or that concentrate on growing
the value of your investment. For instance, a retirement fund
generally does not need to produce income until you retire, so you
might want to consider emphasizing more of a growth strategy until
you are close to retirement and more of an income strategy later
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 in determining 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 may 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.
Sound Strategies for Everyone
Everyone lives his or her life differently, and everyone has
complicated emotions about money, so investment decisions are
highly personal and unique to each person. But there are some basic
rules that apply to most investors.
- To provide liquidity for emergencies, you may want to have a
cash reserve in a money market fund1, traditional
savings account, or certificate of deposit (CD), no matter what
your life stage.
- Also, if you can tolerate even a little risk, you may want to
have some portion of your portfolio in stocks to help protect your
savings from being devalued due to inflation.
- Another good idea is scheduling annual reviews of your
investments with a financial advisor. This habit will keep you up
to date on your investments and help spot potential problems in
your investment strategy.
- Finally, every investment decision should include tax
considerations. Investment earnings can be taxable, tax deferred,
or tax free. You should be aware of the taxable status of your
investments and take that into account when setting up and
reviewing an investment strategy.
Investing for Life Stages
Although everyone's attitude toward investing and money 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, but what about
other life stages that aren't so closely related to age?
Let's say you're 40 and expecting your first child. You'll need
to decide how to balance your finances to account for the
additional expenses of a child. Perhaps you'll need to supplement
your income with income-producing investments. Moreover, your child
will be entering college at about the time you're ready to retire!
In these circumstances, your growth and income needs most
certainly will change, and maybe your risk tolerance as
The following are some major life events that most of us share
and some investment decisions that you may want to consider:
When you get your first "real"
- 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
- Invest after-tax dollars in municipal bonds that offer
- 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
- Invest some of your non-retirement savings in a short-term
investment specifically for funding your down payment, closing, and
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 options for your account in your company's
retirement savings or pension plan. You may be able to either keep
the money in your old plan, transfer it to your new employer's
plan, take a cash distribution, or roll the money over to an
individual retirement account (IRA).
When all your children have moved out
of the house:
- Boost your retirement savings contributions.
When you reach 55:
- 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
- Review your combined potential income after retirement and
reallocate your investments to provide the income you need while
still providing for some growth in capital to help beat inflation
and fund your later years.
Discipline and a Financial Advisor Can Help
One of the hardest things about investing is disciplining
yourself to save an appropriate portion of your income regularly so
that you can meet 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.