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The Smartest Way to Invest Your Money at Every Age

By: David Bach  |  Last Updated: October 26, 2020
Financial Expert & 10x New York Times Bestseller

If you want to get rich, it’s going to take more than just saving a portion of your income — you need to put your money to work. 

When it comes to investing, there are a lot of different directions you could go, but I’m going to make things as simple as possible for you. For starters, there are two principles I want you to keep in mind: One, your money should be invested in a combination of cash, bonds and stocks. And two, the nature of this combination should change over time as your life situation changes.

 

Below, I’m going to detail how much of your money should be invested in cash, bonds and stocks depending on your age. You’ll find that I’ve broken down your financial life into four phases: the “getting started” years (teens to 30s), the “making money” years (30s and 40s), the “pre-retirement” years (50s to mid-60s) and the “retirement” years (60s and beyond). Your needs and goals are different during each time period— so your investment strategy should also be different. 

The phase you’re in will determine what percentage of your nest egg should be allocated to each of five standard types of investments. In order of risk, from safest to most risky, there are:

  1. Cash 
  2. Bonds
  3. Growth and income investments (mutual funds and ETFs that invest in both growth and income securities, with the goal of providing investors with long-term growth but also a source of income through dividends)
  4. Growth investments (mutual funds and ETFs that focus on investments in growth stocks)
  5. Aggressive growth investments (mutual funds and ETFs that invest in companies that have high growth potential but also carry more risk) 

The younger you are, the more risk you can afford, since you have more time to ride out an economic downturn. The older and closer to retirement you are, the more “safe” you want to keep your money. 

Here’s how I recommend you invest your money at every age.

The “Getting Started” Years: Teens and 20s

This phase in life is all about focusing on growing your net worth. At this age, you can afford to invest more aggressively and take on a fair amount of risk because you have time to weather the ups and downs of the market.

Here’s how I recommend allocating your money if you’re investing in your teens or 20s:

Allocate 5-10% of your portfolio to cash
Allocate 5-15% of your portfolio to bonds
Allocate 30-40% of your portfolio to growth and income investments
Allocate 40-50% of your portfolio to growth investments
Allocate 5-10% of your portfolio to aggressive growth investments

The “Making Money” Years: 30s and 40s

In this phase, you’re 10 or more years to retirement and are still focusing on building your net worth. You can continue to take on some risk, as you won’t need this investment income for at least a decade. 

Here’s how I recommend allocating your money if you’re investing in your 30s and 40s:

Allocate 5-10% of your portfolio to cash
Allocate 15-25% of your portfolio to bonds
Allocate 35-45% of your portfolio to growth and income investments
Allocate 25-35% of your portfolio to growth investments
Allocate 5-10% of your portfolio to aggressive growth investments

The “Pre-Retirement” Years: 50s to mid-60s

By now, you’re less than 10 years to retirement. You may be earning a higher income than you ever have and you may have fewer financial responsibilities (maybe your home is paid off or your kids are out of school), so you can afford to take on some risk but want less volatility since retirement is right around the corner.

Here’s how I recommend allocating your money if you’re investing in your 50s and mid-60s:

Allocate 5-10% of your portfolio to cash
Allocate 20-30% of your portfolio to bonds
Allocate 30-40% of your portfolio to growth and income investments
Allocate 15-25% of your portfolio to growth investments
Allocate 0-5% of your portfolio to aggressive growth investments

The “Retirement” Years: 60s and beyond

Once you’re enjoying retirement or very close to retiring, your main goal is to protect your net worth. You should avoid risk and consider sticking with safer investments. 

Here’s how I recommend allocating your money if you’re investing in your 60s and beyond:

Allocate 10-15% of your portfolio to cash
Allocate 25-35% of your portfolio to bonds
Allocate 30-40% of your portfolio to growth and income investments
Allocate 10-20% of your portfolio to growth investments
Allocate 0-5% of your portfolio to aggressive growth investments

So now what?

The guide above can help you select how to allocate the money you put into your 401(k) plan or other retirement account. Chances are, your plan will offer you a menu of investment choices quite similar (if not identical) to the ones listed above. If so, you can simply use the percentages from the pyramid to distribute your dollars appropriately. 

Note that many company retirement plans offer participants a one-stop mutual fund choice that combines all of the different kinds of investments you have to make under one “roof.” If that’s the case for you, you don’t need to worry about whether you may have confused an aggressive growth fund with just a growth fund, and vice versa. Nor do you need to figure out what percentage of your money should go into bonds versus stocks. 

This super simple kind of investment goes by a variety of names — it might be called a target date mutual fund or a life stage fund. Some of these funds have a specific year in their name (for example, the 2030 fund or the 2040 fund), the idea being that you select the fund closest to your projected retirement date and the fund manager builds a diversified portfolio broken down between stocks, bonds, cash, etc. The fund is automatically rebalanced and the risk is reduced in the portfolio as you get closer to retirement. 

If you don’t have a 401(k) plan and are investing your future money elsewhere, rather than looking for individual stocks and bonds that match the particular risk profile that is right for your situation, I suggest you put your money in appropriate mutual funds or exchange-traded mutual funds (ETFs). These are types of investment funds that are easy to invest in, cost-efficient and offer instant diversification without having to buy individual investments themselves. 

There are thousands of different funds to choose from and anyone can purchase them through companies like Vanguard, Fidelity, Charles Schwab and T. Rowe Price. Different funds offer different mixes of cash, bonds and stocks, so choose one that is best for your situation using my guide above. You can also use robo-advisors to invest in low-cost funds.

 

Does investing all of your retirement money in a single fund seem too easy to be true? Even a bit boring? Over the years, as a financial advisor, an investor and a money coach, I’ve seen really great markets, so-so markets and absolutely horrific markets. If I’ve learned one true secret to being an investor who does well in both good times and bad, it is this: Managing your money should be boring!

Boring works. If you invest your money using the percentages that align with your age that I highlighted above, you will end up with a well-diversified portfolio that is professionally managed. And you’ll be well on your way to retiring rich.

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