Educating Investors

Investment allocation at different age5 min read

If at any time your savings don’t grow at the same rate as inflation, you are effectively losing the real value of money. Therefore, it is imperative to start investing in appreciating assets yielding higher returns than the rate of inflation in the country.

Investment is a decision that abridges the probability to achieve future financial goals. Investing at a young age would benefit the portfolio and reap the magical benefits of compounding. A fundamental outcome of compounding is that return on the principle and the return on the accumulated earnings of the previous years’ cumulatively compound every year i.e. interest on interest.

Albert Einstein had claimed Compound interest to be the eighth wonder of the world. One who understands it – earns it; he who doesn’t – pays it. 

Now that we have established that investing is an important activity and a crucial decision of your financial career, the next addressable question is when we should start investing? Well, Investing is a routine, and there is no specific timeline to invest. The early investing around the 20s when graduation is about to get over will be the best suitable timeline. 

Earlier, the better! Longer, the merrier!

However, if someone has not started investing, no one is missing the bus. One can start investing at any age. The only impact would be on the risk appetite and long-term financial goals, which in turn will decide the strategic asset allocation of the portfolio. As you age, the asset allocation might change in favour of less risky assets because of increasing responsibility in their 30s and beyond and a higher need for stability, eventually decreasing the risk appetite of the investor.

Best Investing Strategies in your 20s 

Here are the top reasons to start investing in your 20s.

  1. Higher risk-taking ability
  2. Higher savings over time
  3. More Recovery time
  4. Higher impact of compounding 
  5. Increased probability towards secured future
  6. Secured Retirement

The legendary investor Mr. Warren Buffet made his first investment at the age of 11 years 

Since the risk appetite is the maximum, a higher allocation may be towards equities, small cap investments etc. – which constitute to be risky investments.

Best Investing Strategies in your 30s

When the age reaches around 30s one may have been left with just less than 30 odd years until retirement. At this age generally, the affordability to take aggressive risks reduces but you are still far away from your retirement. This setting may allow the investor to create a hybrid portfolio with equal exposure to equity and bonds. A greater sense of responsibility demands enough liquidity as well to survive in times of uncertainties and crisis, i.e. emergency fund. Another alternative to reduce the overall portfolio risk is through mutual funds. Mutual funds are an inexpensive way to diversify the portfolio.

Best Investing Strategies in your 40s

The individual may be at the peak of their career with the highest possible salary in this age bracket. Therefore, allowing the investor to make proper adjustments to their social security accounts (post-retirement benefits). Since there are just less than two decades to retirement, one may not accept unwarranted risks to the portfolio. An ideal portfolio would increase the exposure to large-cap stocks (considered stable) and bonds. Also, this is the same age bracket where the investor may want to pay off his debt obligations in entirety to a sound retirement. Higher-income from primary occupation also allows for such repayment and becoming debt-free.

Best Investing Strategies in your 50s

This is the age bracket where retirement is just around the corner. The main focus would be to safeguard the corpus necessary to fund the post-retirement age. In India, where the government does not social security benefits, a higher percentage of the income maybe even invested in highly liquid securities to fund some unexpectantly high medical bills. Most of them might have insurance policies to cover their medical bills too as unfortunate ailment may be expected in this age bracket and beyond. It would reasonably make sense to dramatically reduce the overall risk of the portfolio and create income-generating assets to fund the monthly expenses post-retirement. An ideal strategy would be to identify monthly spending needs, decide the risk appetite and identify assets providing such returns to satisfy the budgeted monthly needs. Interest on corporate bonds, high dividend-yielding stocks, risk-free government bonds, rent from real estate etc. are few of the many passive asset classes for the retirement portfolio.

Thumb rule of Investing based on age

If none of the above strategies works best for you, one of the most straight forward strategies of investing based on your age is the 110 Rule of InvestingThe plan gives out the asset allocation towards equities (high risk) based on age. The age of the individual is subtracted from the number 110, and the answer shall be the percentage allocation towards equities. Let’s calculate the asset allocation for a person in its 40s. (110-40). That will be 70% in equity and 30% in bonds. The fundamental presumption of this rule is that the overall risk appetite for any investor reduces as they age. Therefore, they should minimise exposure towards equities as they grow older and mature towards retirement. There are variations to this rule as coefficient maybe 100 or 120 depending on the risk aggressiveness. 

Eventually, How much you invest depends on every decade of promotion you make for your financial freedom. Warren buffet rightly said, “Do not save what is left after spending; instead spend what is left after saving.”

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