Investment strategy and stock allocation can play an important role in your retirement. Investing is not just about building wealth for today; it is also an important part of saving for your future. One thing that you may have overlooked is the importance of asset allocation, and how it needs to be adjusted as you get older.
Shifting from the stock market to an alternative like a managed fund is something that you will eventually need to consider.
Your Stock Allocation Should Decrease with Age
Stock market investments come with the highest level of risk and the highest potential reward. Trading stock can be exciting and profitable in the short and mid-term markets.
Your asset allocation in stocks should be highest when you are younger. As you get older, reduce your stock investments and limit your stock portfolio to long term growth stocks with high dividend prospects.
Some investment advisors recommend the 120 Rule. Take 120 and subtract your age, and the resulting number is the percentage of your portfolio that should be made up of stocks.
So, if you’re around 40 then you could have a portfolio that is roughly 80% stocks, whereas at 60 your portfolio should only be 60% stocks. The older you get, the more you need to pull back from direct stock trading to reduce risk.
Buy into Funds as You Reduce Stock Allocation
You’ll still need to continue investing when you slow down on stock trading. Simply putting your profits into savings would be one option, but it’s not one that is likely to create any meaningful wealth. Even certificates of deposit will only provide a moderate return.
To maximize returns when you pass the age of 50, managed mutual funds can be highly effective. With a mutual fund you will still have the benefit of exposure to the stock market, but the key difference is that you won’t need to worry about trading, stock selection, or diversification. With a low fee mutual fund, you can have professional investment managers grow your money for you.
Mutual funds come with risk like any other investment, however, fund managers do have incentives to create returns. This type of investment has typically performed well for late stage investors and should be considered once the high-risk environment of the stock market is no longer suited to your long-term goals.
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