Investing Through Life’s Stages

Key Points

» Factors That Affect Your InvestmentDecisions
» Growth or Income
» Time and Risk Tolerance
» Sample Asset Allocations
» Sound Strategies for Everyone
» Investing for Life Stages
» Discipline and a Financial Advisor Can Help
» Points to remember

Investing is a lifelong process. The sooner you start, the better
off you’ll be in the long run. It’s best to start saving
and investing as soon as you start earning money, even if it’s
only $10 a paycheck. The discipline and skills you learn will
benefit you for the rest of your life. But no matter how old you
are when you start thinking seriously about saving and investing,
it’s never too late to begin.

The first part of a successful lifelong investment strategy is
disciplined savings habits. Regardless of whether you are saving
for retirement, a new house, or just that extravagant dining room
set, you will need to develop rigid savings habits. Regular
contributions to savings or investment accounts are often the most
productive; and if you can automate them, they are even
easier.

Factors That Affect Your Investment Decisions

Once you begin saving on a regular basis, you’ll soon have to
decide how to invest the money you are saving. Regardless of what
financial stage of life you are in, you will have to decide what
your needs are and how comfortable you are with risk.

Growth or Income

What do you need the money for? The answer to this question will
help determine whether you want to put your savings into investment
products that produce income for you, or that concentrate on
growing the value of your investment. For instance, a retirement
fund does not need to produce income until you retire, so your
investing strategy should focus on growth until you are close to
retirement. After you retire, you’ll want to draw income from
your investment while keeping your principal intact to the extent
possible.

Time and Risk Tolerance

All investing involves a certain amount of risk. How well you
tolerate price fluctuations in your investments will need to be
balanced against your required rate of return in determining the
amount of risk your investments should carry. An offsetting factor
to risk is time. If you plan to hold an investment for a long time,
you will probably tolerate more risk because you have the time to
make up any losses you may experience early on. For a shorter-term
investment, such as saving to buy a house, you probably want to
take on less risk and have more liquidity in your
investments.

Sample Asset Allocations

PORTFOLIO RISK LEVEL
	Low		Moderate		Aggressive
% Treasury Bills	30	30	20	10	10	10
% Bonds	40	30	30	40	30	20
% Growth Stocks	30	30	40	30	50	70
% Small Caps	0	0	0	10	0	0
% International	0	10	10	10	10	0

Chart illustrates sample portfolio asset allocations: Low Risk
(those nearing or in retirement); Moderate Risk (middle-aged
investors); Aggressive Risk (younger investors).

Allocations are presented only as examples and are not intended
as investment advice. Please consult a financial advisor if you
have any questions about how these examples apply to your
situation.

Sound Strategies for Everyone

Everyone lives his or her life differently, and everyone has
complicated emotions about money, so investment decisions are
highly personal and unique to each person. But there are some basic
rules that apply to most investors.

To provide liquidity for emergencies, you should probably
always have a cash reserve in a money market fund¹ or
traditional savings account or CD, no matter what your life
stage.
Also, if you can tolerate even a little risk, you should
probably always have some portion of your portfolio in stocks to
help protect your savings from being devalued due to
inflation.
Another good idea is scheduling annual reviews of your
investments with a financial advisor. This habit will keep you up
to date on your investments and help spot potential problems in
your investment strategy.
Finally, every investment decision should include tax
considerations. Investments can be taxable, tax deferred, or tax
free. You should be aware of the taxable status of your investments
and take that into account when setting up and reviewing an
investment strategy.

Investing for Life Stages

Although everyone’s attitude toward investing and money is
different, most investors share some common situations throughout
their lives. For instance, where you are in your life cycle
certainly affects how you invest for retirement, but what about
other life stages that aren’t so closely related to age?

Let’s say you’re 40 and expecting your first child.
You’ll need to decide how to balance your finances to account
for the additional expenses of a child. Perhaps you’ll need to
supplement your income with income-producing investments. Moreover,
your child will be entering college at about the time you’re
ready to retire! In these circumstances, your growth and income
needs most certainly will change, and maybe your risk
tolerance as well.

The following are some major life events that most of us share, and
some investment decisions that you may want to consider:

When you get your first “real”
job:

Start a savings account to build a cash reserve.
Start a retirement fund and make regular monthly contributions,
no matter how small.

When you get a raise:

Increase your contribution to your company-sponsored retirement
plan.
Invest after-tax dollars in municipal bonds that offer
tax-exempt interest.
Increase your cash reserves.

When you get married:

Determine your new investment contributions and allocations,
taking into account your combined income and expenses.

When you want to buy your first
house:

Invest some of your non-retirement savings in a short-term
investment specifically for funding your down payment, closing, and
moving costs.

When you have a baby:

Increase your cash reserves.
Increase your life insurance.
Start a college fund.

When you change jobs:

Review your investment strategy and asset allocation to
accommodate a new salary and a different benefits package.
Consider your distribution options for your company’s
retirement savings or pension plan. You may want to roll over money
into a new plan or IRA.

When all your children have moved out
of the house:

Boost your retirement savings contributions.

When you reach 55:

Review your retirement fund asset allocation to accommodate the
shorter time frame for your investments.
Continue saving for retirement.

When you retire:

Carefully study the options you may have for taking money from
your company retirement plan. Discuss your alternatives with your
financial advisor.
Review your combined potential income after retirement and
reallocate your investments to provide the income you need while
still providing for some growth in capital to help beat inflation
and fund your later years.

Discipline and a Financial Advisor Can Help

One of the hardest things about investing is disciplining yourself
to save an appropriate portion of your income regularly so that you
can meet your investment goals. And if you’re not fascinated
with investing, it’s probably also hard to force yourself to
review your financial situation and investment strategy on a
regular basis. Establishing a relationship with a trusted financial
advisor can go a long way toward helping you practice smart money
management over your entire lifetime.

Points to Remember

The first step in a successful lifelong investment strategy is
to develop disciplined savings habits.
Throughout life, you should assess your need for growth or
income.
You will have to determine your overall tolerance to risk and
regularly reassess your tolerance. Education and a long-range
investment goal can help raise your risk tolerance.
An offsetting factor to risk is time.
You should probably always have a cash reserve in a money
market fund, traditional savings account, or CD.
You should probably always have some portion of your portfolio
in stocks to help protect your investment from being devalued due
to inflation.
Increase regular investment contributions when your financial
situation improves.
Start separate investment funds for specific purposes, such as
a fund for college or the down payment for a house.
Schedule annual reviews of your investments.

¹An investment in a money market fund is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any
other government agency. Although the fund seeks to preserve the
value of your investment at $1.00 per share, it is possible to lose
money by investing in the fund.

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