No single investment strategy is right for everyone. As your goals change and you approach retirement, it’s wise to reconsider your current strategy to ensure it’s going to get you where you want to be.
Here are some of the best strategies for investing.
1. Balance Risk & Return
There are numerous investment options to choose from, each with different risks and different rates of return. Generally speaking, the higher the chance of making money, the higher the risk of losing some (or all) of your investment.
One example of a high-risk investment is a small startup company with a stock price that goes up and down significantly every week. Low-risk investments usually offer a more modest rate of return, but you could lose money to inflation over time. Low-risk investments often include bonds and stocks — also known as equities — in larger, more established firms like blue chip companies.
2. Diversifying Investments
Diversification is an important element in any investment portfolio, usually a mix of both high-return and low-risk investments. Mutual funds are an example of a diversified portfolio because your investment is spread across a broad mix of stocks and bonds. Growth-oriented funds represent a higher risk, but also a greater chance of growth. Bond funds represent a low risk and low growth. Balanced funds usually find harmony between the two.
3. Investing in the Early Years
For anyone just entering the workforce, Robert Johnson, CFA, CAIA and president of The American College of Financial Services, strongly recommends investing in stocks for a good rate of return.
“Simply put, the greatest advantage for an investor is time,” he says. “A person just entering the workforce should invest in the equity markets, as they provide the highest returns over a long period of time. While equity returns are highly variable, over time equity investors outperform bond investors by a wide margin.”
From his experience, Johnson says millennials are overly risk-averse and focus on savings rather than investing their money.
“This may seem like a subtle difference,” he adds, “but the difference has significant ramifications. When people save, they take little risk. When people invest, they take [more] risk.”
Despite the greater number of years they have to absorb risk and generate greater returns on their investments, Johnson says, millennials are actually more conservative than older generations.
4. Investing in the Retirement Red Zone
As you approach retirement, you can begin lowering risk in your portfolio by reducing the amount invested in equities and putting more money into fixed-income securities, Johnson advises. He compares the years just before retirement to the red zone in a football game.
“When one is within a few years of retirement — say five — they are entering the retirement red zone,” he explains. “Just as a football team can’t afford a turnover when inside the opponent’s 20-yard line, an investor can’t afford a turnover when they are within a few years of retirement.”
A recent example, Johnson says, would be someone who was due to retire after the 2008 stock market crash.
“If they were invested solely in a diversified S&P 500 index fund, they would have seen the value of their portfolio drop by 37%,” he says.
Regardless of what stage of life you’re in, a portion of your savings and investments should be quickly accessible in case of emergency. Racking up big debts will hurt your bank account and your credit. (You see where you currently stand by pulling your credit reports from each of the three major credit reporting agencies for free every 12 months at AnnualCreditReport.com and viewing two of your credit scores, updated every 14 days, for free on Credit.com.)