I often get asked by friends who are at their late forties and early fifties what is the best way to invest in the capital market. Before getting into that, here are few things that you must know.
There are numerous asset classes—or, to put it simply, investment “categories.” The three main assets classes are:
- Stocks (equities)
- Bonds (fixed-income securities)
- Cash and cash equivalents
There are also other assets classes such as:
- Real estate
- Futures and other derivatives
Each asset class has a different level of risk and reward and each class behaves differently over time, depending on what’s happening in the overall economy and other factors.
When the economy is booming, investors are confident. They take money out of the bond market and move it into stocks, where historically the earnings potential is much higher.
When the economy cools, investors get jittery. They take money out of stocks move it into bond market.
Here’s why that’s important. You must invest in a variety of asset classes, this provides diversification in your portfolio. Investing. That diversification keeps you from losing all your money if one asset class goes down. How you arrange the assets in your portfolio is called asset allocation. For those who are in the late forties and early fifties, here is what is recommended.
- Stocks: 50% to 60%
- Bonds: 40% to 50%
Having some of your investments to more stable, low-earning funds like bonds and money markets can be a good choice if you don’t want to risk having all your money on the table. Now is also the time to take note of what you have and start thinking about when might be a good time for you to actually retire. Getting professional advice can be a good step to feeling secure in choosing the right time to walk away.
Another item that should be addressed when thinking about your portfolio is what other income you’ll have during retirement. If you’re fortunate enough to have a good-sized pension when you retire, this could allow you to take more risks with your savings than you otherwise might. Why? Because your retirement would be less dependent upon the success of your investments. Some people, when taking an academic approach to asset allocation, factor in the present value of a pension and view that as a fixed-income investment.
If you’ve procrastinated saving for retirement until your 40s—or if you were in a low-paying career and switched to something better—now is the time to get serious. If you’re already started something, use this time to do serious portfolio building. You’re at the midpoint of your career, and you’re probably approaching your peak earning potential.
If you like to get in touch with me to discuss how to start your investment, please go to the site below and leave your details.