How To Invest For The Rest Of Your Life

Often, financial writers tell us how to invest for a given age: How to invest now that you’re 40, or how to invest as you enter retirement.

It’s not a bad idea. We’ve done it a few times ourselves.

But consider what these approaches have in common: You have to invest in something, since cash is subject to inflation. And you must have a plan, some kind of standard to measure against.

Otherwise, your investments can be overwhelmed by disorder and chance. A lot of people’s portfolios look like the proverbial yard sale: Stock that once were hot, a bond past its prime, that biotech expected to turn the industry on its ear. Now it trades for pennies, so why sell?

It’s hard work, coming up with how to invest consistently. Thankfully, there’s a fair amount of really good research on the topic.

Here’s the simple breakdown:

1. You should own stocks

Stocks simply perform better than most other assets. They’re also more volatile, so it’s important to maintain a balance between stocks and non-equity investments, such as bonds and real estate.

2. Income matters

An important part of your portfolio is “total return,” that is, the income value of a position plus price appreciation. You get income from dividend stocks, bonds and investments such as real estate investment trusts.

3. Avoid trading

That’s doesn’t mean buy a blue-chip stock and hold it until retirement. It does mean staying in the market until the market gives you a reason to cash out. This is best accomplished by owning a portfolio of asset classes and selling gainers to buy losers through simple, periodic rebalancing.

4. Watch your costs

The biggest risk you face is losing money to mutual fund fees and commissions. Brokers and mutual funds will literally suck your portfolio dry if you aren’t careful. It’s better to own inexpensive index funds and ETFs over pricey actively managed products.

5. Adjust as you age

Remember when I said to own stocks? Well, you should, but the size of that position should decline as you get closer to retirement. The big problem for many investors in 2008 was owning far too many volatile investments so close to quitting work. For younger folks, a stock crash is essentially meaningless. The rest of us should look to lower risk.

Can you invest this way the rest of your life? Of course. Anybody can. It’s not a zero-maintenance approach, but it is a very low-fuss way of achieving the goal everyone wants, to grow money prudently in order to enjoy it in our old age, worry free.