Investing Through Life’s Stages

    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 choose to automate them, they are even easier.
Factors That Affect Your Investment Decisions
    Once you begin saving regularly, you’ll have to decide how to invest the money you are saving.
Regardless of what financial stage of life you are in, 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.
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 here are some basic rules that apply to most investors.

* To provide liquidity for emergencies, you should probably 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 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 common situations in 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. If you’re not fascinated with investing, it’s probably 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
1.  The first step in a successful lifelong investment strategy is to develop disciplined savings habits.
2.  Throughout life, you should assess your need for growth or income.
3.  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.
4.  An offsetting factor to risk is time.
5.  You should probably have a cash reserve in a money market fund, traditional savings account, or CD.
6.  You should probably have some portion of your portfolio in stocks to help protect your investment from being devalued due to inflation.
7. Increase regular investment contributions when your financial situation improves.
8.  Start separate investment funds for specific purposes, such as a fund for college or the down payment for a house.
9.  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. © 2011 McGraw-Hill Financial Communications. All rights reserved. June 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by, a local member of FPA.