How To Invest At Different Life Stages

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Investing is a lifelong process. Over the long run, the earlier you get started, the better you will be. It is best to begin investing and saving as soon as you first start to earn money. With that said, it is never too late to start.

Cultivating savings habits is the initial step in having a successful investment strategy. You should be contributing to an investment or savings account on a regular basis for a start. To make this process easier, it is better to have it automated.

Factors Affecting Your Investment Decisions

No matter which financial stage you currently are at in your life, you will first, need to decide what risk level you are comfortable with and what your needs are.

Income or Growth

Ask yourself: “What are you going to need your money for?”

Knowing your investment goals will help you decide whether you would need an income producing portfolio or a portfolio that grows in value.

For example, you will not need your retirement fund to produce an income for you until you have retired. Therefore your investment strategy should be focused on growth until you’re near retirement age. Once you have retired, you would probably want a portfolio that provides an income while exposing your capital to lower risk.

Risk Tolerance and Time

There is risk involved in all investing.

As an investor, you will need to strike a balance between your risk tolerance level and your required returns.

Time can be used to offset risk.

An investor with a longer time horizon for investing will (in theory) be able to tolerate a greater amount of risk as he has more time to regain or tide through short term losses.

An investor with a shorter time horizon would want to take less risk. He would also want investments that are more liquid.

Safe Strategies For Everybody

There is no 1 single investment strategy that suits everyone. Each investor is exposed to their own culture, lifestyle, spending habits, goals and risk tolerance. Hence, the decisions made by each investor is often suited to their own needs.

However, there are basic guidelines in investing that would apply to most investors;

  • Emergency Fund is a must-have. An emergency fund should be in the form of cash and is highly liquid. Your emergency fund gives you a buffer should you need money for an emergency so that you would not need to touch your investments.
  • Investing helps to protect your savings from inflation. If you can tolerate some level of risk, it is good to have a portion of portfolio in stocks.
  • If you are lazy, go with an index fund like the STI-ETF or the Vanguard S&P500 Index Fund. If you want greater returns and are willing to work for it, learn to pick undervalued stocks and invest in them.
  • Review your portfolio regularly. Do this annually to have an understanding of how your portfolio is doing, how close you are to your goals and if there are any actions you should be taking to improve your returns.

Investing For Various Life Stages

Throughout their lives, there are common life stages that most investors will go through.

We list these stages, along with some investment decisions and actions you might want to take into consideration:

Your first full-time job:

  • Set up a savings account and start building your cash reserve
  • Set up a retirement fund (this can be done via a bank account), and make regular monthly contributions. It doesn’t matter how much, its more important to get started

Your Pay Raise:

  • Increase your savings / Increase your retirement fund contribution
  • Consider investing in bonds

Getting married:

  • Figure out your new investment allocations and contributions, while taking into consideration your combined expenses and income

Saving for your first house purchase:

  • Consider shifting some of your cash reserve into short-term investments that can fund for your down-payment

When you become a parent:

  • Check the need for additional insurance
  • Increase your cash reserves
  • Consider starting an education fund for your child

Changing Jobs:

  • Your asset allocation and investment strategy should be reviewed in order to accommodate a different benefits package and new salary

As you are nearing retirement:

  • Keep saving for your retirement.
  • Review the asset allocation in your retirement fund – You might need to start modifying your retirement fund to focus on income production vs growth.

At retirement:

  • Reviewed your total potential income and make reallocation to your investments in order to provide you with income that you need while at the same time offering some growth in capital potential for helping to beat inflation.

Points To Keep In Mind

  1. A successful investment strategy requires developing disciplined saving habits.
  2. As you go through the different life stages, review your financial needs and investment goals.
  3. Understand your personal risk tolerance. Learning how to invest safely and sticking to an investing strategy that you are confident of will increase your risk tolerance.
  4. Having a longer time horizon allows you to tide through market downturns.
  5. Always have an emergency fund or a cash reserve.
  6. Investing can help to protect you from inflation. There are many investing tools that an investor can choose from.
  7. Whenever your financial situation improves, increase the amount of your regular investment contributions.
  8. Create specific investment funds or bank accounts for different goals.
  9. Review your investments regularly.