Investing by Age - How Should you be Investing According to your age

If you are planning to build your retirement savings, you have to know how to invest. After all, it is only when you save and invest over the years before retirement from your job that you can get a big-enough egg nest retirement fund.

It is also essential to know that the same investment strategies are not suited all your life. What works in your 20s won’t work in your 40s. How you invest at each age determines the success of your retirement.

Asset allocation

Before you even start to think about investing, it is important to understand the concept of Asset Allocation. In investing, there are various classes of assets like:

Stocks

Bonds

Cash and equivalents

Commodities

Real estate

Futures and various other derivatives

Each of these asset classes have different levels of risk and reward in returns. These behave differently over time, depending on the economy and several other factors. For instance when the economy is booming, you have confident investors who withdraw money from the bond market and invest in stocks where there is a likelihood of higher profits. The opposite is true when the economy is not good. Generally, bonds and stocks are negatively correlated, but during any financial crisis it is not the case. However, generally, bonds help in the volatility of the stock market.

If you put all your money in one asset class, you’ll lose everything when this asset faces a loss. This is why everyone says one needs to diversify one’s investment portfolio. Diversification enables you to save money in case one asset class fails or goes through a loss. For instance, even if you lose on stocks, you may not have too many problems since most of your savings are on mutual funds and bonds. Asset Allocation is the arrangement of allocation of assets in your financial portfolio. Depending on your age and the number of years you’ve been doing investing, asset allocation can look quite different.

Asset allocation by age

Here is a suggestion of asset allocation through one’s various life stages. Remember, these are suggestions and recommendations only. Your investment decisions shall still depend on your age and circumstances. It’ll also depend on your risk appetite.

A financial advisor can help you considerably, as can online brokers.

Regardless of your age, you should first have 6-12 month’s living expenses saved in the money market, savings account and liquid Certificate of Deposit.

Investing during your 20s

Suggested asset allocation:

Stocks: 80-90%

Bonds: 10-20%

Even after graduating from college, you may still be paying off your student loans. This is a good time to start investing. This can be through a Provident Fund, a Savings Account, or something else. Save what you can, even if it is 10% of what you earn. If you start investing now, you’ll have a huge advantage over those who start investing later. And a lot of people do so. This is also a good time to go for aggressive investment strategies.

Investing in your 30s

Suggested asset allocation:

Stocks: 70-80%

Bonds: 20-30%

If you haven’t started investing in your 20s, this is the best time to do so. This is the time you are or already have established your career. You are still comparatively young to reap all the rewards of compound interest, but still are old enough to be investing a meagre 10-15% of your income.

Contributing to your retirement fund should be a top priority now, regardless of what loans and credit card debts you may have now. You still have at least 40 years of working life left, so make this time count. You can be somewhat aggressive in your investment, but it’ll pay to be play it safe now. Buy bonds for safety.

Investing in your 40s

Suggested asset allocation:

Stocks: 60-70%

Bonds: 30-40%

If this is the time you’re starting your investment at, it is high time to get serious about it. If you started already in your 20s and 30s, it is now time to consolidate and deepen your financial portfolio since during this time you are earning the most you will in your life. To beat inflation, invest in aggressive stocks, but always take advice from a financial advisor.

Investing in your 50s and 60s

Suggested asset allocation:

Stocks: 50-60%

Bonds: 40-50%

You are getting quite close to your retirement age, and so don’t lose focus now. This is also the time to make conservative investments. Switch to stable and low-earning funds since these come with less risk.

 

Investing in Cryptocurrency vs Investing in Stocks

People who are not entirely sure about investing in the stock market may look for other investment options - such as cryptocurrencies like Bitcoin, Litecoin and Ethereum. While taking cryptocurrencies into consideration, however, make it a point to calculate your investment goals and risk tolerance as well.

Take the time to learn about investing in cryptocurrencies, such that you know for sure whether having a cryptocurrency in your portfolio will be beneficial or not.

Cryptocurrency Risk vs. Stock Risk

To mention the obvious, investments come with risk. The market could end up crashing for reasons beyond casual comprehension. Companies going bankrupt is not a novelty. On the other hand, a particular stock could shoot up at any time, or even grow gradually. Assessing these risk and gain factors is essential when deciding on the assets to be added to your portfolio.

Although there are risks common to most investments, stocks differ in that to some extent you can be guided to gain some understanding of how prices may change. Things like the ratio of stock price and earnings provide a good understanding of a company’s financial health.

It is this particular indicator that cryptocurrencies lack, when compared to stocks. As it is entirely based on supply and demand, cryptocurrency is speculative in nature. To some degree, all currencies get their value from the willingness of people to pay for it, but this does not necessarily hold true for a cryptocurrency. As it operates in a much smaller market, certain big swings can influence it as a whole.

All said and done, cryptocurrencies are a relatively new development that has not yet been widely adopted. This adds an altogether new level of risk as it is possible that they could get replaced by other efficient alternatives, or could even be banned due to regulations!

Cryptocurrency History vs. Stock History

While past performance is certainly not a surefire indicator of the future, it can help assess how well investments have done over a period of time. For convenience, let’s take the case of the most prominent cryptocurrency out there itself - Bitcoin.

Bitcoin price was seen fluctuating between ₹15000 and ₹40000 per coin in 2015. Come 2017, and the value shot up, to a high of nearly ₹1450000. However, it dropped down to below ₹255000 in December 2018! In 2020 itself, the prime cryptocurrency’s value has shuttled ₹280000 and ₹660000. So no matter how high the price of any cryptocurrency stands right now, an abrupt drop is all but to be expected.

On the other hand, stock growth spurts and drops are not nearly as dramatic, and have been quite stable. The S&P 500 index, which was at $2,000 in early 2015, grew steadily to around $3,100 mid 2020, although it did go through some ups and downs along the way. Similarly The Dow Jones Industrial Average (DJIA)  also grew from $17,000-18,000 to around $25,000 during the same period.

Historically, stocks have given more or less 10% returns annually (6-7% considering inflation). However, in the case of Bitcoin and cryptocurrencies, this is far from being true.

Who Is a Good Fit for Cryptocurrencies?

People in search of some serious diversity in their portfolio can definitely do with some Bitcoin or Ethereum, as they provide a potent alternative to more traditional assets. They also help if you want assets which are not denominated in terms of regular currency.

Generally, even if you gravitate towards having a lot of cryptocurrencies in your portfolio, it ideally shouldn’t be the primary focus of your investment drive. The extent of it must depend on how your risk-tolerance, i.e., you should be comfortable losing the amount you invest in cryptocurrencies. If nothing else, try to keep it to 1-5% of your portfolio.

Who Is a Good Fit for the Stock Market?

Most investors tend to keep stock options as a majority of their portfolio, and experts agree that that is the way to go as well. Thanks to its base characteristics, it is a more stable and reliable investment that you can account for in terms of profits over time. Even in the face of short-term irregularities, it is safe to assume that most companies will continue to exist, if not flourish, hence providing a decent amount of stability. Broad-based index funds & exchange-traded funds (ETFs) constituted by stocks, chances are that your investments will hold up well long-term.

Is It Still Worth Investing in Cryptocurrencies?

Affording even a whole unit of a certain cryptocurrency is quite a feat these days - that is to say the prices have gone up really high. Considering this fact, and combining the idea that even such a large investment is not a safe bet, you’d be forgiven for wondering if it is already too late to invest in cryptocurrency.

Here, again, it has to be said that the call is yours. If you believe in the concept of blockchain technology and cryptocurrency, certainly devote whatever you can spare to have them as a small share of your investment portfolio. If you are still doubtful, it is better to not invest in cryptocurrencies at all.

What are Assets? Why should You Care?

An asset is anything that you own, and that which has monetary value. As you might have guessed already, assets include your house, agricultural land, properties, cars, stocks, checking account, and even investments.

It is important to take stock of, or inventory of, your assets. It helps you to find out what your assets are worth. And remember, the value of assets change over time. The value of your car depreciates with each passing year, while conversely, the value of land increases over time.

That being said, you want to ensure that they are protected. For instance, you want to ensure that your assets are protected from natural disasters, divorce cases, lawsuits, and more. All this helps you to leverage your assets to meet emergency situations on time.

Let’s start by giving you a very basic intro into assets, and how assets can affect you. Your assets can be business-related, or they can be personal things. However, for the purpose of our article here, we shall be focusing on personal assets only.

Let’s look at the type of assets you can have.

Remember, some assets depreciate in value over time.

1. Cash and cash equivalents: These are assets in the form of money which is stored in checking accounts, savings accounts, certificate of deposit, and other account types.
2. Tangible assets: These are physical things which you can touch. This includes business properties, personal properties, boats, cars, art and jewelry.   
3. Intangible assets: These are assets you cannot touch, and thus these are in the form of bonds, stocks, pensions and royalties.
4. Liquid assets: All liquid assets are cash, or can be converted into cash easily. As such, this category includes bonds and stocks which are easily tradable. Price is not affected when you sell these.
5. Fixed assets: These are the opposite of liquid assets, and are also called illiquid assets. These cannot be converted into cash quickly. Additionally, their values change over time. This includes antiques, real estate, furniture, and etc.
6. Fixed income assets: This includes money lent on interest, certificates of deposit, government bonds, securities, and etc.
7. Equity assets: These are the securities and other assets which you own, like mutual funds, stocks, and retirement accounts.

Why do your assets matter?

Your assets are important, not just because of the monetary value, but also because they are essential in determining your financial net worth. Net worth is a fancy word for personal price tag. Over time, your net worth increases.

 Net worth helps you monitor your progress in reaching personal financial goals. 

Here are some scenarios in which you have to know your asset value.

1. Net worth- Net worth, as we said before, helps in shaping your financial health. How can you calculate your net worth? Just subtract your liabilities from your assets?
2. Insurance- Want to insure your jewelry or your house? You need to know how much they are worth before doing that. Insurance helps you to deal with many things which may affect or impact these assets, such as flood, fire, robbery, liability, and even court cases. Assets can earn you an income too; you may want to consider protecting your livelihood from these assets with disability insurance.
3. Loan applications- When you apply for loans, lenders check what liquid assets you have. In case you default, these shall be sold to give them a cover for their loss. If you have assets, you can negotiate a lower interest rate. Besides, having these ensure that you have funds enough to fall back on in times of emergencies.
4. Collateral- Depending on what loan you are taking, you may have to give your car and home as collateral. As with all loans, in case you default, these go to the lender.
5. Divorce- During divorce, your assets, money and possessions get divided between you and your spouse.
6. Bankruptcy- If you file for bankruptcy, your assets can be sold. 
7. Retirement- When you retire, it is important to have assets to fall back on. What if you need money quickly after retirement, and a whole lot of it? You can sell some assets to meet such a situation.

Financial Ruin - 5 Ways to Stay Away from Financial Ruin

You don’t need to buy stocks at top companies like Google or Apple to build wealth. You don’t need to speculate and play the stock market game either, Yes, the rewards are there, but the risks are huge. Do not make colossal financial problems for yourself, especially if there are others depending on you. The good thing is that there is an easy way to build wealth.

Investing is important to build wealth over time, but it is not the only thing that’s important. Investing is powerful, and some strategies there can make you pretty wealthy. However, you can be certain of windfall profits from your investments, and sometimes you may not get any profits at all. It is downright risky because, what’ll you do in case of certain life events like job loss, medical emergencies and the like?

You cannot prepare for every scenario, but you can cut down some mistakes that are costing you financially. Here are some of the ways to stay away from financial ruin.

   Learn to say no: Don’t gamble to excess, don’t drink to excess, never do drugs, and never cheat your loved one. These things cost you a lot, financially and mentally. Just by avoiding them you can stay away from costly behaviors and problems, and you can therefore stay on the profitable path of your finances.

   Invest like you earn: Are you a lottery winner? We thought not. And that means that you are earning your living from paycheck to paycheck per month. This is not a matter of luck anymore. Whatever you are earning right now, you deserve it due to your hard work over the years. Your current salary is the result of your discipline and hard work over the years.

As you can see, this is a long-term process, not unlike an outperforming stock. If a stock suddenly comes to your knowledge that swears to give immediate, big benefits, stay away from it. Don’t sacrifice your hard-earned savings.

Don’t get divorced: Seriously, don’t get divorced. This is because the cost of a divorce is huge in terms of alimony, living expenses and the like. One divorce can derail your personal finances for life. Now, we know that this is easier said than done, but try not to go your separate ways after tying the knot, ok?

Don’t sell off your primary income source: We know that you want to earn more. That is what everyone else wants. However, to earn more, do not give up your primary income source. For instance, to earn more, do not sacrifice a huge part of your savings on the share market. To earn more, don’t resign from your job until your side business is enough to pay for your livelihood.

Pay attention to your spending habits: You may not know, but you may be spending more than you know. You may think that a few bucks here are there won’t matter much, but if you add them all up at the end of the month, these can add up to quite a bit of money. In other words, spend consciously, and always think twice before buying something expensive.

Stock Market vs. Mutual Funds: Which is Better?

Your investment decisions depend on the risk you're willing to take to gain a quantum of return. If you wish to get higher returns, you need to take greater risks.

The time you take for learning about individual companies is crucial for investing in the stock market. Learning about mutual funds usually takes lesser time. Unless you are a seasoned investor or are prepared to put in a substantial amount of time and effort needed to become one, it isn't beneficial to invest in equities/stocks directly.

Stocks Versus Mutual Funds

The Risk Factor

Stocks are more exposed to market-induced risks than mutual funds. Funds pool stocks under a stock fund or bonds under a bond fund. This streamlines the returns and reduces risk due to two reasons:

If one of the companies in the fund has a poor manager, a doomed strategy, or is simply performing miserably, the loss incurred from that company is neutralized by the companies which perform well.

Investing in mutual funds is less time-consuming and takes less effort.

From the fund manager's perspective, it takes time to research about the mutual funds, which could pose a major challenge. Fund managers keep updating the companies listed in your kitty; hence, it's sometimes difficult to understand the composition of your fund.

You can look at the past performance of your fund, but when your manager changes the companies listed under your fund, the performance can change dramatically as well. Additionally, mutual funds impose annual management fees, while stocks only bear an initial outlay cost.

Risk-Return Tradeoff

Mutual funds reduce investment risk by pooling stocks or bonds under various types of funds. Diversification in the investor's portfolio substantially reduces the risk; poor performance of a few companies is counterweighted by the good performance of other companies/businesses.

Investing in stocks can be time-consuming

Learning how to invest in stocks can be time-consuming. You need to conduct extensive market research and understand the direction of movement of the stocks and the reason behind such trends. Only then can you determine the most suitable investment option.

For investing efficiently, you'll need to study the financial reports extensively to know the profitability of the company and the strategies that can be employed to increase returns from investments.

To choose mutual funds, you don't need to learn how every company that you have invested in is performing; that's the mutual fund manager's job. However, you'll be required to research the historical performance of the mutual funds. Apart from that, you also need to find out the most promising sector.

Investing in both the financial instruments needs extensive knowledge of the market and the economy as a whole

Tax Liability

All equity portfolios need the investor to relentlessly update his/her portfolio by buying and selling shares as the desirability of the stocks keeps varying. When you're trading shares by yourself, you will be attracting tax liability.

However, in an equity mutual fund, such trading is done by the fund manager and you don't incur a tax liability because the transactions aren't made by you. Using the tax multiplier, you can calculate the amount of tax that can be saved. This might seem like a small amount, but it makes a huge difference in the long run.

Are you Disciplined Enough?

The stocks should be spread over at least five sectors with a fixed amount allocated to each sector. A certain percentage should be held only in large companies since they tend to be more stable when the market is strenuous. These rules establish a framework which ensures that the portfolio stays safe and diversified from shocks which could hit particular sectors or stocks.

Individuals who invest in the stocks rarely have the discipline and knowledge to do so.

Minimum Investment Size

Everyone looks for higher divisibility in their investments. One of the primary advantages of investing in mutual funds is diversification of the portfolio into smaller and more flexible blocks, starting with amounts as low as 100 rupees. On the other hand, if you want to have an equally diversified portfolio with stocks, you'll require a huge sum of money as a head start.

Cost of Investing

You must pay a fee to a mutual fund manager unlike investing in stocks where you aren't liable for paying any extra amount to someone else for managing. Active management of funds is an affair which doesn't come free of cost. In the case of stocks, apart from the brokerage fees and security transaction tax, you'll also need to pay charges for opening a demat account, which isn't required if you're investing in mutual funds.

Overall, it is relatively cheaper to invest in stocks. Mutual funds charge a fee for the fund manager's services. With stocks, the only charge is the transaction charge.