Investing in your 20s, 30s & 40s
Investing is a lifelong process that takes effort and time and whilst maximisng from current market trends for short-term gains may sound like the right thing to do, the focus should be on making your wealth grow over your lifetime. For retail customers it is always recommend to go with a medium to longer term outlook on investments. After all, how you save and invest in the decades before you are about to leave your 9-to-5 job will greatly impact how you will spend your post-work years.
However, every phase in your life requires a unique approach to investing, whereas the asset allocation strategy you use in your 20s and 30s might not be appropriate when you are close to retirement. Younger individuals who can tolerate more risk, often have less income to invest and in contrast, those who are a step closer to retirement may have more money to invest but less time to recover from any losses.
Irrespective of your age, you must have both a practical and a systematic approach towards handling your finances. So have a look at how you should invest at every stage in your life so that you can build your wealth and plan for a successful retirement long before you near the end of your career.
Why is investing important at any age?
People often mistakenly believe that investing is complicated and consider it a feat only the rich and experienced can accomplish, but this is far from the truth. With the help of an experienced financial advisor and a financial plan designed to help you accomplish both your short and long-term goals, investing can help you grow your net worth over time.
Here are some simple, yet effective principles you can follow:
The earlier you begin investing, the better
Any wealth you manage to accumulate down the line will greatly depend on when you start investing. With this in mind, ideally you should begin doing so as soon as you start receiving your first paychecks. Investing even small amounts will allow your money to compound and grow exponentially over time, providing you with financial security. Neglecting doing so because you feel you do not earn enough is a huge mistake that can ultimately cost you.
Invest for your long-term goals
Whether you are looking to amass sufficient funds to see you through retirement or make a luxury purchase as you approach middle age, investing is meant to grow your money so that you can spend it in the distant future. But in order for your investments to serve as a source of income later on in life, you must aim to invest a minimum of 10 to 15% of your gross income and ideally, you should combine this with a diversified portfolio.
Do not forget your short-term goals
These could be objectives that you would like to fulfil in five years’ time, like purchasing your first property or taking a dream holiday. Your short-term goals should also include any emergencies, like your car breaking down or unexpected medical expenses.
Keep your investment horizon in mind
Your investment horizon is the length of time you have at hand to hold a security or a specific portfolio. Ranging from as short as a few days to decades, your investment horizon should closely align with your goals. For instance, if you are in your early 40s and plan to live on your investment income by age 65, your investment horizon is 25 years. Bear in mind that the longer your investment horizon, the more aggressive you can afford to be since you will have more time at your disposal to recover from any temporary market downturns that may occur. As you approach your retirement age, your investments should be less risky so that you can preserve whatever wealth you have created so far.
With this in mind, here is what you should be doing at every stage of your life.
Investing in your 20s
An era that spells carefree living, investing is probably the last thing on your mind as you have reached your 20s, however, the earlier you begin, the better. In all likelihood, you would have completed your studies and have moved on to being employed. But unlike later stages of your life when you will have expenses to deal with like paying a home loan or taking care of a household and children, your first paycheck is likely to stretch much further than you think and if you are concerned about the limited funds you have available for investing, remember that you do not need thousands of euros to get you started.
Before you take any decision about saving or investing, you should have a comprehensive overview of your finances. Do you keep maxing out your credit cards? Or perhaps you have a spending habit that often spirals out of control? You must first tackle your debt and spending habits before you even begin investing for your future. This is why your first step should always be about setting up goals since these will greatly affect your investment objectives.
During your 20s you should also work towards creating an emergency fund. This should cover three to six months’ worth of monthly expenses. It may sound like a lot of money, but if you consistently save month in month out, your emergency fund will soon have sufficient funds for unexpected mishaps. One last goal you should keep in mind is your retirement. While this might be light years away, retirement planning should begin now. Have a look at why retirement planning is important and how you should go about it.
The greatest benefit you can tap into at this stage is time. With time on your side, you can lay a solid foundation for the kind of lifestyle you would like to have in the future. Here is where compound interest is a crucial factor. An essential concept to grasp when managing your finances, compound interest is interest calculated on the initial principal which also includes any accumulated interest from previous periods on a deposit. It is the result of reinvesting interest as opposed to paying it out.
To simplify things further, let us assume you invest €300 per month starting at age 20 and you do not stop doing so before you turn 60 years old. If you had managed an 8% return during this period, by age 60 you would have accumulated €1 million, whereas if you had waited until you reach 30 to get started, you would have missed 10 years on gains you can never get back. It is no surprise then that Albert Einstein praised compound interest as the eighth wonder of the world.
Consider investing as part of a broader financial plan. A good option is to invest in stocks or bonds through Exchange-Traded Funds, otherwise known as ETFs. By investing in ETFs you can hold pieces of many investments such as S&P 500 index funds that holds shares of several stocks, as opposed to buying individual stocks that require more time and research.
Seeking advice from a professional? Here are some questions you should ask before making any investment.
Investing in your 30s
If your 20s was marked by your imminent graduation, starting out on your career and getting out of any debt, many of your concerns in your 30s will be more domestic in nature. You may have gotten married and bought a house, while you may be having children soon or you may have already become a parent. Although this equates to more responsibilities and costs to consider when planning for the future, you probably have more income opening up further opportunities for saving and investing. By now, you should have consolidated your financial goals set in your 20s, while you should have mastered managing and controlling your cash flow more effectively.
Have you been putting off saving in your 20s? Then your 30s is when you need to seriously start putting money away. You may have had several goals to save up for in the past, however, you will find that in your 30s you would have accomplished a number of these. But as you age, you should seek to ramp up your savings gradually since doing so will not only help you add to your retirement pot, but it will also help you save for other goals, such as your children’s education. Here is a guide about saving for your children’s future.
Saving for an emergency fund should be a major objective, otherwise you risk having to tap into funds that may be reserved for a different purpose. The same applies when it comes to contributing towards your retirement. Even though you may be paying a mortgage or starting a family, you still have around 30 to 40 active working years left so part of your retirement strategy should include setting aside 15% of your income. Ideal for helping you make those necessary provisions in order to maintain your standard of living in the later years of your life, CC’s Lifetime Private Pension Schemes enables your pension pot to grow at an unrivalled rate with added security from a diversified nature of investments.
Your 30s is a time to consolidate your investments, however, investing while covering important expenses at a stage in life where financial responsibilities seem to be constantly multiplying can be easier said than done. You must figure out how much you can put away towards your investments while still have enough liquid cash to meet your needs. But holding too much cash may make it difficult to stay ahead of inflation and generate sufficient returns, so do build cash reserves but funnel as much as possible to your investments and other goals.
The good thing is that you are still young enough to reap the benefits of compound interest and with a higher salary to that in your 20s, you should be investing around 10 to 15% of your income. Investing at this stage in your life should be all about fine-tuning your strategy so that it matches both your short and long-term goals. With time still on your side, you may want to consider high-risk investments. For instance, you may want to invest in the stock market or in mutual funds or a combination of various types of investments for a diversified portfolio.
Mutual funds pool money from several other investors who purchase shares of a collection of assets like stocks, bonds and other securities, while they are typically overseen by a portfolio manager. A smart and cost-effective way to invest since many funds enable you to purchase shares with just a few euros, the price of a mutual fund is also known as its net asset value (NAV) and it is determined by the total value of the securities in the portfolio divided by the number of the funds’ outstanding shares. This price fluctuates according to the value of the securities held by the portfolio at the end of each business day.
Irrespective of the investment vehicle you ultimately select, investing is a complex activity so it is always wise to seek professional help. Qualified and boasting a wealth of experience, CC’s advisors can address clients’ unique needs, while they have access to a full range of investment products.
Investing in your 40s
As you inch closer to retirement, you should start envisioning what the rest of your life might look like. Do you expect to retire in 20 or more years? Are you planning to live at a slower pace yet still work part-time? Do you see yourself starting a new venture? If you have been procrastinating or were in a low-paying career and have switched into something more lucrative, now is the time to play catch up.
Big expenses tend to occur suddenly when you least expect it. Whether it is a house repair or losing your job, having a substantial amount of funds readily available for when chaos strikes can provide that much needed financial stability. This becomes even more significant in your 40s when you would have reached your peak earning potential, so having a cushion that can last up to a year is ideal. Aim to have 3 times your annual salary saved by 40 and four times that by 45.
Also, as you reach your 40s, you may have accumulated a number of debt due to a house and car loans or credit card debt. Your financial plan should help you eliminate these, just as much as small adjustments to your spending habits like saving €100 more a month or perhaps working one additional year before retiring. Have a look at how CC can help you manage and grow your wealth.
In addition, you may want to consider getting a life insurance policy. As you grow and move through life setting off to get married, buy a home, build a family, grow your business and plan for retirement, life insurance can provide you with peace of mind that you, your family and your business are protected. CC offers a wide range of insurance coverage ensuring long-term, tax-efficient capital growth ranging from protecting your family and home to covering your funeral costs and safeguarding your business in the event that you or a key individual within your company dies.
Typically, the closer you get to your retirement age, the less risk you should take on so as to avoid losing any money you may be needing sooner rather than later. However, the right investment mix should always depend on your individual risk tolerance, as well as factors such as today’s low interest rate environment, rising life expectancy, your retirement income needs and flexibility.
Increasing the portion of your portfolio dedicated to more stable investments is a good idea but do not overdo it otherwise you risk hampering your investment growth. For instance, if you are roughly 25 years away from retirement, you might want to consider having 80% of your money invested in stock funds and the rest in bonds. As you get closer to 15 years before retirement, you might want to change things around and have less exposure to stocks and more to bonds.
While money invested now might not have as much time to grow compared to funds invested in your 20s or even your 30s, you can still build a solid nest egg as long as you contribute consistently. Having said that, being aggressive does not mean being careless. You should always aim for investments that have a solid track record of producing returns and be wary of deals that appear too good to be true. This is why diversification is so important. By adequately diversifying your investments among industry, company size or geographic location, you can make the most of your earning potential while minimise the risks should any single part of the economy suffer.
Becoming a disciplined saver and investor early on is key to living the life you desire down the line and while today you may be trading your time for money, in the future you will be able to use your money to give you time to do more of the things that truly matter in life.
One of Malta’s largest independent financial services group and a founding member of the Malta Stock Exchange, CC pioneered the local financial services industry in 1972. Since then, the Group has established itself as a 360-degree financial planner for investments, pensions and life insurance.
CC can help you select the best approach irrespective of your age so that you can take full advantage of the market opportunities that will allow you to build the profits that you need. Get in touch with us today to speak to one of our experienced financial advisors.
The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.
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Calamatta Cuschieri Investment Services Ltd is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.