Investing for the Different Stages of Life

There are as many different recommendations for how to invest as there are investment advisors. You may have heard the saying about economists – namely "if you took all the economists in the world and put them end to end they still would not reach a conclusion." I suppose the same could be said of financial advisors. Part of the problem is that there are many paths to riches, and many things to invest in. There are however some simple universal truths that need to be considered when you plan your investments.
First is risk versus reward. If you want high returns then you have to take higher risks. There is no getting around this one. Financial instruments like treasury bills, bank investment certificates, and government bonds have low risk – in fact almost no risk – but they also pay the lowest returns. Equities on the other hand have higher risk and higher fluctuations but over long periods of time they pay the best returns. Another way to think of it is an example that comes from the mortgage industry. If you are lending your money to someone for a mortgage, you will get the average market rate if they are a good credit risk. However if they have a terrible credit history then you will charge much higher interest because the risk of default is much higher and you might be stuck with a repossessed house that you cannot sell for many months or even years. The higher interest rate covers the possibility that you may have lost earnings in the future while you try to sell the property that secured the mortgage.
Second is, the older you get, the less fluctuations you want in your investments. If you are counting on your investments for income then you probably don’t want to be down 14% one year and up 28% the next and have no return at all in the third year, for example. Ideally you want to balance your portfolio so it provides a nice reliable stream of income – even if it isn’t making the maximum possible growth. One rule of thumb is to use your age minus 100 to determine the component of your portfolio that should be put in equities. So if you are 20 years old, put 80% in equities and 20% in fixed income, like bonds. If you are 50 years old put 50% in equities, etc.
Third, you will probably not do well choosing single stocks. Unless you are watching the stock market as a full time job, it will be a crapshoot. It’s much better to invest in ETF’s or low expense index funds that at least track the entire market. These are virtually unaffected when one company goes belly up.
Fourth, don’t invest everything all at once. Spread it out over a period of time. This is the same as dollar cost averaging. In general the market goes up over time. But over the short term it is up and down many times. If you spread out your investments then you will hit some down points (this is good because you are buying low) and some high points. The likelihood of dumping it all in at a peak (buying high) is lessened.
Finally you should remember that just because things are not doing well in North America (or any other continent) that doesn’t mean the whole world is in a slump. Keeping a foreign component in your portfolio makes sense. The USA was relatively flat in growth in 2004 but some areas of Latin America did over 20% growth that same year