What's the best investment strategy for my age?

DIY or get help?

Getting started with investing has never been easier. There are several online brokerage services that make it easy to sign up and begin. You can buy mutual funds or ETFs, individual stocks, and more. If you feel like you need a little help, there are also various robo-advisors. These are technology-based services that provide automated financial guidance and other services. On the other hand, sometimes it feels best to talk with an actual person about your investments. In this case, you may want to find a financial advisor to help you.

Finding your risk profile and asset allocation strategy

You’ll need to figure out your risk profile first to decide on your mix of asset classes. An asset class is a type of investment. For example:

• Stocks
• Bonds
• Cash
• Commodities
• Real estate
• Stock futures

Each asset class has its own level of risk vs. reward. There are online questionnaires and calculators you can use to determine your risk profile. Also, robo-advisors usually have a system that walks you through a series of questions to help you understand the level of risk you are comfortable with and then it recommends a portfolio (that has different asset classes) that matches your risk profile. You can always go old school and work with a financial advisor to determine your risk profile, too.

It’s worth noting that the asset allocation strategy you may use when in your 20s is very different from what you would use in your 50s or 60s. When you’re young, you may want to take on the risk of a portfolio that is heavy on stocks - an asset class that tends to have a higher degree of risk but also usually a higher likelihood of returns. When you’re older, you may want to be more conservative, opting for a portfolio that is heavier on bonds – an asset class that tends to be less risky but also tends to not deliver the earning potential of stocks.

A traditional way of determining how much you should allocate to stocks is to subtract your age from 100. For example, if you’re 25, you would have 75% of your portfolio in stocks. If you’re 65, you would have 35% in stocks.

Generally, it’s a good idea to have a mix of investments in order to diversify your portfolio and spread out your risk. That way, if one of your asset classes experiences a big downturn, you may have others whose gains could help offset the losses.

Additionally, be aware that your risk profile may change over the years as your life situation changes or you simply grow older. That means it’s a good idea to revisit your risk profile (and asset allocation) every now and then to make sure you’re still comfortable with the ratio of risk vs. reward in your portfolio and adjust it if need be.

The 401(k) and IRA

In many situations, it’s smart to take advantage of a workplace plan like a 401(k). With a traditional 401(k), the amount you invest comes out of your paycheck before taxes are taken out and it grows tax-free until you retire. Additionally, some employers may offer a Roth 401(k) that doesn’t give you the initial tax benefit because you invest money you’ve already paid taxes on, but it grows tax-free and all withdrawals are tax-free.

When you enroll in the 401(k) program, you are usually given the ability to choose from a selection of funds that may have different risk profiles. So, you can choose a fund that matches how aggressive or conservative you like to be with your investments.

Best of all, your employer may offer a match. For example, your employer may offer to match up to 4% of your annual salary. That means if you invest 4% of your salary in your 401(k), your employer will throw in another 4%. Free money!

If your workplace doesn’t offer a 401(k), you can still get a tax benefit for investing by opening a traditional individual retirement account (IRA) or a Roth IRA.

Starting in your 20s

Your first question may be, “How much should I invest?” Of course, it depends on your unique situation, but 10 - 15% of your annual income is generally considered a good goal (after building that emergency fund we mentioned before).

Next question. When should you start? Quite simply, as soon as possible. By starting early, you take full advantage of your greatest asset – time. Time amplifies the power of compounding interest. That’s where you not only earn interest on your money but you also earn interest on your interest. To learn more about the power of compounding interest, check out the post, Your Most Valuable Asset.

For some in their 20s, it may be enough of a challenge to max out their contributions to their 401(k) or IRA. Those limits for 2023 are $22,500 for a 401(k) or $6,500 for an IRA. At the very least, it may be smart to contribute enough to your 401(k) to get the company match.

If you still have money to invest after funding your 401(k) or IRA, you may want to open an online brokerage account or work with a financial advisor. Which brings us to the question of what you should invest in.

When you start in your 20s, you may feel comfortable taking on more risk, knowing that you have plenty of time to recover from a downturn. That extra risk usually comes with a greater potential for higher returns. With that said, here is a sample asset allocation for people in their 20s:

• 80% to 90% stocks
• 10% to 20% bonds
  

In your 30s

In your 30s, you’re most likely earning more than you made in your 20s. And you still have time to weather the ups and downs of the market and take advantage of the power of compounding interest.

It may make sense to invest in that workplace retirement plan first for all the same reasons we outlined for those in their 20s.

If you have additional money to invest after that, consider this sample allocation for people in their 30s:

• 70% to 80% stocks
• 20% to 30% bonds

You may also want to consider a health savings account (HSA) if your health plan offers the option. It can be funded with pre-tax dollars and may even allow you to direct it into an investment fund. You can then withdraw the money tax-free to pay for qualifying medical expenses. Plus, it moves with you if you change jobs or retire.

In your 40s

In your 40s, you’re a couple of decades into your career with, most likely, a couple more to go. While your timeline may be shorter than someone in their 20s, there is still plenty of time to see the benefits of investing.

It’s important to assess your tolerance for risk, knowing you may want to be a little more conservative. Here is a sample allocation for someone in their 40s:

• 60% to 70% stocks
• 30% to 40% bonds

At this age, it’s not unusual to have an expanded family, a larger mortgage, and other financial obligations. It may be smart to review your insurance coverage at this time to ensure you’re protected by non-invested funds in case you’re caught by a surprise financial event.

In your 50s

It may be easy to tell yourself that it’s too late to start investing in your 50s, but nothing could be further from the truth.

You still have time to build a nest egg using your workplace plans. In fact, at this age, you get a bonus. You can take advantage of catch-up contribution allowances. For example, if you are 50 years old or older in 2023, you can add another $7,500 to the contribution limit for your 401(k), lifting the maximum contribution to $30,000 per year. If you have an IRA and you are 50 or over, you can contribute an additional $1,000, raising the maximum contribution to $7,500 for 2023.

You may want to be a bit more conservative than your younger counterparts because you have less time to recover if the market takes a dive. For those in their 50s, here is a sample allocation:

• 50% to 60% stocks
• 40% to 50% bonds
  

In your 60s

In your 60s, you may want to focus your investment strategy on creating a steady income, minimizing taxes, and making your money last. For that reason, you may want to look at everything from annuities to investments that pay a dividend. A financial advisor can help you navigate the years moving from work into retirement.

Here is a sample allocation for those in their 60s:

• 40% to 50% stocks
• 50% to 60% bonds

It's never too early or too late to start investing. Regardless of age, the principles of building a diversified portfolio and maximizing tax advantages remain relevant. Adapt your investment strategy to your life stage, financial goals, and risk tolerance. Seek professional advice when necessary, and keep in mind that consistent, disciplined investing is the key to financial security. Most of all, remember that the most important step is to simply start.

For more on investing, check out the Investing section in our Financial Health Hub. You’ll find valuable insight and guides to begin your investing journey.