Invest: Ways To Invest smarter At Any Age
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The key to lifetime fitness is a powerful coreâstrong and flexible abdominal and back muscles that help with everything else you do and protect against aches and injuries as you age. In your financial life, your core is your long-term savings, and strengthening it is simple: Settle on the right stock/bond mix, favor index funds to keep costs low, fine-tune your approach periodically, and steer clear of gimmicks such as ânontransparent ETFsâ or âhedge funds for small investorsââWall Streetâs equivalent of workout fads like muscle-toning shoes.Hereâs the simple program:
1. Know Your TargetIf you donât already have a target allocation for your age and risk tolerance, steal one from the pie charts at T. Rowe Priceâs Asset Allocation Planner. Or take one minute to fill out Vanguardâs mutual fund recommendation tool. Youâll get a list of Vanguard index funds, but you can use the categories to shop anywhere.
2. Push Yourself When Youâre YoungInvestors 35 and under seem to be so concerned about a market meltdown that they have almost half their portfolios in cash, a 2014 UBS report found. Being too conservative early onâputting 50% in stocks vs. 80%âreduces the likely value of your portfolio at age 65 by 30%, according to Vanguard research. For starting savers, 90% is a commonly recommended stock stake.
3. Do a U-turn at RetirementAccording to Wade Pfau of the American College and Michael Kitces of the Pinnacle Advisory Group, you have a better shot at a secure retirement if you hold lots of stocks when youâre young, lots of bonds at retirement, and then gradually shift back to stocks. Their studies found that starting retirement with 20% to 30% in stocks and raising that by two percentage points a year for 15 years helps your money last, especially if you run into a bear market early on.
4. Be Alert for Hidden RisksOnce youâve been investing for several years and have multiple accounts, perfecting your investment mix gets trickier. Hereâs a simple way to get the full picture of your portfolio.Dig out statements for all your investment accountsâ401(k), IRA, spouseâs 401(k), old 401(k), any brokerage accounts. At Morningstar.com, find âInstant X-Rayâ under Portfolio Tools. Enter the ticker symbol of each fund you own, along with the dollar value. (Oops. Your 401(k) has separately managed funds that lack tickers? Use the index fund thatâs most similar to your fundâs benchmark.)Clicking âShow Instant X-Rayâ will give you a full analysis, including a detailed stock/bond allocation, a geographic breakdown of your holdings, and your portfolioâs overall dividend yield and price/earnings ratio. Look deeper to see how concentrated you are in cyclical stocks, say, or tech companiesâa sign you might not be as diversified as you think or taking risks you didnât even know about.
5. Donât Weigh Yourself Every DayClosely monitoring your progress may help with an actual fitness plan. For financial fitness, itâs better to lay off looking at how youâre doing. A growing body of research finds that well-diversified investors who check their balances infrequently are more likely to end up with bigger portfolios, says Michaela Pagel, a finance professor at Columbia Business School. One reason: Pagel says savers who train themselves not to peek are more likely to invest in stocks. And research by Dalbar finds that investorsâ tendency to panic sell in bear markets has cut their average annual returns to 5% over the past 20 years, while the S&P 500 earned 9.2%.When you have the urge to sell, remind yourself that your time horizon is at least 20 years, says Eric Toya, a financial planner in Redondo Beach, Calif. âOutcome-oriented investors agonize over every up-and-down whim of the market and make poor timing decisions,â he says. âIf your process is sound, you donât need to panic.â
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