There are several ways to invest for the future. But the right way for you usually comes down to 3 things:
- Your Goal – Determine what you are trying to achieve and how much money it will cost
- Your Risk Tolerance – What level of potential loss you can or are willing to endure
- Your Time Horizon – When do you want to achieve your goal
Let’s take a common goal that people have which is retirement. In general, the younger you are, the more risk people are more willing to take. This is because generally younger people have more time and earning potential to recover any money which is lost.
As you age, you get closer to retirement age so many people tend to reduce their risk (aka “de-risk”) their portfolio. The last thing you’d ever want to do is risk losing everything you’ve worked for so close to the finish line!
Here are a few approaches that typically align with where people are relative to retirement:
Leaning Towards Growth (Younger Investor): A Growth strategy means that your portfolio tends to lean towards companies that expect to see significant increase in stock price. Some examples include companies that recently went IPO, companies that focus heavily on innovation, or companies that implement a significant change to their strategy.
Blended Strategy (Middle Aged): This strategy combines the other strategies in order to participate in the potential increase of a Growth strategy while making sure not to put most of the portfolio risk. This may manifest as an equal percentage of the portfolio dedicated to each of the other strategies listed here.
Capital Preservation (Nearing Retirement): The idea here is pretty straight-forward—make sure not to put your retirement at risk! It may be tempting to take your money and put it into the new hot stock or other investment trend. But if you are close to retirement, if it that hot stock instead plummets, it can mean that you have to delay retirement or downgrade your lifestyle in retirement. Instead, someone with this strategy may choose to put their money in stocks that don’t tend to move up and down so drastically.
Income Strategy (Retirement Achieved!): If you’ve accumulated quite a bit of money, it’s time to enjoy the fruits of your labor! But it’s not simply a matter of withdrawing from that money. That money needs to work for you be generating cash. This is typically achieved by having a portfolio that focuses on stocks that generate a dividend. As a shareholder of these companies, you are entitled to receive a cash payout (usually once per quarter) whenever these companies share their profits with the company owners (which you are one!). For example, a portfolio worth $2Million that has an average yield (the dividend as a percent of the value of stock) of 5% is expected to generate $100,000 per year.
This really shows how being disciplined in investing can pay off at the end.