We can start investing at any age, be it our teens, early 20s, 30s, 40s or even 60s. In fact, the earlier we start, the better.
However, is there a guide as to how we should invest our money depending on our age?
Timing & Investments
A huge part of investing is about the timing of our investments and the various factors that we would need to take into consideration at the time of our investments. The fact that people in the same age group tend to share certain circumstances does seem to contribute to some correlations between age and ideal investment strategies for people in different age groups.
Our Capacity For Risk
The younger you are, the more time and energy you would have left to recuperate your starting capital should anything go wrong with your investments. The older you are, the less time and energy you would have to do that.
Hence, younger people would tend to have a larger capacity for risk than older people. In other words, younger people can afford to lose more (less risk adverse) than older people due to the time they have left.
The General Correlation Between Earning Power & Age
The younger and less experienced you are in the workforce, the lower the salary you are likely to be able to command, as compared to someone who’s older and more experienced in the workforce.
This would enable the older person to put together a larger starting capital to invest more easily than a younger person who has a weaker earning power.
Commitments & Dependants
As we get older, the more commitments and dependants (such as family & kids) we tend to have. Hence, as our commitments and dependants grow, we are less able to take on risky investments because our decisions would directly affect the livelihood of our loved ones.
While we are still young, we can afford to take on more risks as the only person we have to be accountable to is ourselves.
Balancing Your Portfolio To Suit Your Circumstances
Hence, since people from different age groups tend to have different needs and considerations, it’s all about finding an investment strategy that would best suit the needs and circumstances of their respective age groups.
Read also: What Is A Diversified Investment Portfolio?
The General Rule
As a general rule, the older you are, you should aim for an investment portfolio that consists largely of low to medium risks investments, since your investment portfolio is likely to be larger than someone who is younger. Furthermore, you’ll also won’t be able to take in as much risk as your younger counterparts due to your responsibility to your family and dependants.
A 80:20 spilt between low to medium risk investments like property rentals, insurance balanced-funds generating an average annual return of 5-10% and high risk investments such as stocks would seem like a sound strategy.
This is because 10% of RM 1,000,000 would be RM100,000 per year and this amount would probably be enough for you to sustain your family and livelihood just on interest alone.
However, that doesn’t mean that an older person should not dabble in high-risk investments at all. The 20% or so allocated to high risk investments like stocks could serve as a bonus if things work out, doubling or quadrupling its investment value. If things don’t work out, you will not have too much to worry about since the 80% of your portfolio in low to medium risk investments are still generating sufficient returns for you to sustain yourself.
The younger you are, you would be more encouraged to take on more risks since your investment portfolio is likely to be much smaller due to your weaker earning power.
Since you have the luxury of time on your side and the freedom of not being tied down by responsibilities and commitments, you have more freedom to take on more risks in an attempt to double or quadruple your portfolio’s total value.
If things work out, you would now have more capital to adopt a more conservative investment strategy. If things don’t work out, you would still have time to recuperate your losses over time and try again sometime in the future.
Hence, if you’re young, a 20:80 spilt between low-risk investments and high-risk investments seems like a sound strategy to adopt since you have nothing much to lose and everything to gain.
But ultimately, you should aim to have a sufficiently large portfolio size from which you could earn a steady stream of low-risk investment driven passive income from when you’re older.
Time Capital vs Monetary Capital
When you are younger, you might not have as much capital, but you have plenty of time. This is when time becomes your capital to take on more risks.
When you’re older, you would probably have more financial capital, but less time. Hence, you would probably prefer to take advantage of your capital advantage and invest in lower-risk investments with a good yield that have a higher barrier to entry such as commercial properties in prime areas.
Exceptions To The General Rule
However, there are always exceptions to the general rule.
If you come from a really wealthy family or have made your fortune at a really young age, then age probably need not be too much of a factor in influencing your investment decisions since you would already have a huge amount of capital to work with.
In The End, It’s Your Choice
Ultimately, it will also depend on our individual preferences and risk appetites. If you are the type of person who is more ambitious and willing to take risks, then there is nothing to stop you from wanting more and continuing to take higher risks even when you’re older.
If you are the type of person who is easily contented and would rather not take on as much risks, then it might be best for you to grow your portfolio steadily and gradually by investing in low-risk investments throughout your entire life.
In conclusion, what we can provide is just a simple guide based on a generalised analysis on what might be best for people of different age groups. But ultimately, it’s your choice!
Read also: How And When Should I Start Investing?
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