Do I have the right mix of investments?Portfolio Management
I'm 32, newly married, no kids. I'm still years away from retirement. Should I have "riskier" investments because of my situation or just play it safe for the long-run?
Amelia - First of all, congratulations to you and your husband on your new marriage. Second, your investment portfolio should be designed to meet your investment needs and goals. But what does this mean, exactly? You mention retirement, so I assume that this is your primary long-term goal at this time. You want your savings and investment growth to provide you and your husband with the resources you will need during retirement. Two of the most important factors in this equation are on your side: you have plenty of time to start or increase your level of savings, and your long time horizon means that the power of compound returns will work to your benefit. We often find that the level of savings and time until retirement affect your retirement savings far more than whether your investment returns are 5% or 7%.
The specific investment types that you should consider depend, in part, on whether you have additional investment goals in addition to saving for retirement. For example, we recommend that all of our clients maintain an emergency reserve in cash or cash equivalents to cover three to six months of ordinary living expenses. You may have other short-term or intermediate needs, such as saving for a major purchase like a home or auto, or paying down student loans or credit card balances. We recommend that you identify all of your needs and goals and associate each of them with a time horizon. A financial advisor can help with this process, but it is something you can also do on your own. Next, you should think about your attitude towards investment risk: do you worry about investments? Do volatile markets make you uneasy or cause you to lose sleep? Do you and your husband have similar attitudes about investment risk? Does your income have a high correlation with financial markets? The answers to these questions will help you in a number of ways ~ they can help to focus on behavioral biases that could affect your investment decision making. The answers might lead you to seek assistance from a professional investment manager rather than managing your own investments, or they may push you in the opposite direction. In either case, your "risk attitude" is one component of your "risk profile" and should be considered when you determine the target risk of your portfolio.
So let's say that your main investment goal is saving for retirement, you have set aside cash for an emergency reserve, and your risk attitude is conservative to moderate (you do not seek investment risk, but you are willing to tolerate some risk if necessary to meet your objectives). I would advise you to invest in a broadly-diversified portfolio of assets, including U.S. and international stocks, along with fixed income securities (bonds). The exact mix that determines your portfolio risk budget would derive from the complete planning and goal-setting process. Your time horizon is sufficiently long that you can afford some portfolio volatility. You have the "risk capacity" to tolerate volatility in return for the possibility of higher returns over the long term. You asked in your question, whether you should invest in equities or "play it safe." Keep in mind that over your full investment horizon --- some 30 years until retirement then another 25 - 35 years in retirement --- risk can materialize in a number of forms. If modest or serious inflation returns to the U.S. economy, a portfolio that does not incorporate risk assets will have its purchasing power eroded. If you invest solely in cash and fixed income securities, which would provide a low volatility portfolio compared to a portfolio with equities, you will be exposed to both inflation risk and the risk of a rise in interest rates. My point is that the risks that you should worry about run broader and deeper than market volatility ~ your portfolio should be designed to be resilient over a wide range of market environments that we will inevitably experience over the next few decades. In addition to diversification of risk, make sure that you pay attention to fund expenses and taxes, both of which will be a drag on your investment returns over the long term.
Hi Amelia, If you have a higher risk tolerance, for someone your age an 80/20 or 70/30 stock bond mix would not be a terrible thing. Of higher importance no matter what your risk tolerance is, saving enough money is more important then investment choices. The average 401k balance is around $40,000. If you want to go with potentially higher returns, historically under valued large and especially under valued small companies have had higher returns. (French/Fama Three factor Model)But there is no free lunch in the investment world; small value companies can be very volatile. Make sure to diversify your investments! I hope this helps
Hello Amelia, you have asked a great question and the answers you have received should truly help guide you down a path that will help meet your needs. A thought is to continue to dollar cost average into your retirement plans (401k perhaps and/or IRAs) on a regular basis to help dampen the risk of market timing!
Amelia, the only recommendation I'll add to the other excellent posts here is to pick up a book by Dr Craig Israelsen called "7Twelve: A Diversified Portfolio with a Plan" on Amazon. While a 70 or 80% stock portfolio might be "appropriate" for someone your age, I find that most people are more comfortable with a lower volatility asset mix than that. A balanced, or moderate asset allocation will give you smoother returns, better compounding, and lower volatility. Therefore, you will be more likely to stick with your plan when the markets are not being friendly. A more aggressive investment mix takes more discipline to ride out the storms. Dalbar research repeatedly proves that most people will not do so. Best of luck to you.