When it comes to investing, we all have our own preferences and tastes. Yet there are several common factors that you must take into consideration before placing your money into a certain asset.
Whether you are trading on your own via a retail investing app such as Robinhood or WeBull or through a brokerage such as Atticus or Fidelity, these are the most common traits to consider:
-Age
-Risk tolerance: conservative, moderate or aggressive
-Short/long term goals
-Debt load/outstanding liabilities
-Plan on growing money for side income or in replace of income
Once you have these logistics set in stone, and donât worry itâs all a guessing game nothing you can truly 100% control, except for your age, you are officially ready to begin.
The only thing that is certain is unceratieny so you just have to roll with it and plan as best as you can. But what is certain is that investing is the only option you have to not be a slave to your time. Working for a job can be stable, supportive and fun, but it wonât make you rich alone.
You may ask, even as a lawyer or a partner at a bank I wonât become rich?
Yes, because the more you earn, the more you give away to taxes and work for your time. Unless you sell your investments in the near future, you donât have to pay your income or capital gains tax on your gains.
So where do IÂ start?
A common myth in the investing world is that you need money to grow money.
Not at all! The average net worth for a college student is -$40k due to student loans, poor spending habits and credit card debt. Yet this is no time to waste, time is your most precious asset after all! You must seize it and take advantage of it. Thatâs why banks are still willing to give out payday loans to those with horrific financial means because well, they want to make money themselves and know that you could profit off it as well in your future. But all in all, banks are a business and so they are mainly concerned about themselves.
Investing Based on Your Life Stage
Another myth about investing is that the older you are, the more conservative you should be or vice versa. The younger you are, the more bullish of an investor.
Not necessarily. The basic principle of investing is personalized so thereâs no one strategy that fits all.
In order to see what strategy fits best, weigh you priorities and ask yourself:
What will you want to do with the money in a few years?
Will you stay invested in the long haul to outset the losses?
After evaluating your, not your best friendâs circumstances, then you will be set.
Personally, most investors and I believe that you should be tolerable of risks until age 30, risk-neutral from ages 30â60 and almost completely risk-averse from ages 60-till death.
To get a grasp on risk tolerance and what plays into choosing your portfolio in regards to growth vs. dividends stocks and passive vs active investments, the main way to add or subtract risky business in your portfolio, go check out this article.
For the most part, if you follow these rules by different life stages, youâll be best prepared with a plan in case of a recession or emergency hits.
Run Like the Bull Up Till 30
At 30, you are most likely in your first few years into a new job, just graduated with an MBA, PHD or just stuck with the conventional and realistic path with a bachelors.
There are 45 million borrowers who collectively owe nearly $1.6 trillion in student debt with an average load of about $30k since September 2020 so you are most likely in the same boat as a graduate yourself.
This is your time to minimize debt by starting to invest as early as possible because your time horizon window is slowly escaping by the minute. Itâs terrific you have a hopefully stable, recurring paying job but this is the time to evaluate your priorities, not gamble away on Robinhood all day.
Instead set up as many passive income streams as possible which starts with investing. Since you are at the stage of having a job, with several investments, although it is always recommended to save, you donât have to frugally live on a tough budget if you have many income streams that can easily pay off your debt.
Your risk tolerance is pretty high at this age because you either have very little cash or are in debt with student loans. Thereâs nothing to loose at this point under 30 so I would suggest having a portfolio with 75% growth stocks, 25% dividends stocks and donât forget 6â12 months of living expenses in cash.
Slowing It Down From Ages 30â60
At this point, you have a decent amount of money built from your 10+ year career, possibly starting a family and have to pay the mortgage for a property. You are accumulating a sizable amount of wealth and need to hold back on living on the edge like a teenager gambling away on Reddit.
In order to stay afloat, you must have a portfolio that is balanced 75/25 passive and active investments since you have to settle down. Children are expensive. The average cost to raise a child in the US is $200k.
These are the key things I would focus on at this age.
You must be cognizant of building your nest egg, have emergency cash for all children not just yourself now, owning real estate if possible to guarantee passive income as my favorite out of all alternative investments, have a backup plan if your spouse divorces, what if you loose your job and need to relocate and find a new job all need to be considered.
I know itâs a lot of adulting but to cut out the pain later on, you must focus on building stability now.
Planning for the worst, hoping for the best is the best plan you could ever have.
Risk-Averse 60-Till Forever a.k.a death
The median age to retire is 61. That is a dramatic decrease from the 90âs which was at 75. These days the life expectancy has shrunken by a year during Covid. I presume this is because people want to head on to early retirement to enjoy life to its fullest and not be a slave to working.
Even though more than half of workers (54%) of the American population plan to keep working past the age of 65, regardless when you are nearing retirement, you must be living lower and have a supportive cushion to keep you afloat.
If you work for a company, you have a 401K set in place. If youâre an independent contractor or entrepreneur then you have your own pension or Social Security and pay for insurance separately which could be costly.
Personally as someone whoâs always been driven to work and needs something to do to stay sane, I can see myself working for as long as I can past 60 years old! I canât only image the average retirement age by 2080.
Will it be 40 or still 60? Time will only tell with the technological innovation shaping our world.
I donât know if this is just my family who are workaholics and love the adrenaline of getting things done but whenever we go on vacation, we get bored after a few days and miss the hustle and bustle of NYC. It can surely get tiring but sitting on a beach all day lathered in sun screen holding a Margarita doesnât appeal to us forever past the age of 75.
Yet, as entrepreneurship is becoming more hip, The FIRE movement (Financial Independence, Retire Early) goal is kicking in for lots of Millennials, roughly 20 million of them.
FIRE means to save and invest every aggressively between 50â75% of your income to retire around your 30s and 40s. If youâve gotten to this stage in life where you are 60, good for you to continue working.
I donât see the point in retiring and doing nothing for the next 50+ years after 30. I would rather get a lower paying job, save 50â60% of my income comfortably and not starve with Ramen just to retire and be bored on a beach. But everyoneâs different!
At this point, thereâs no choice but not to be risk-adverse and take no risk at all because you are nearing an age where you arenât earning a salary and must rely on your hard earned money from your lifetime to support you.
This may be the scariest time of your life since you are only depending on your spouseâs or your social security and previous life career to keep you afloat.
In addition, you are a target for scammers and your priority is to keep your assets safe. In that case, it is strongly recommended to hire a financial advisor, at any age but particularly when you are older since they will handle your assets accordingly and if your net worth is over 10m+, itâs smart to get a trust for your grand children to avoid probate when you pass.
Baby Steps
Now that weâve uncovered how to approach risk at age stage in life, we must discuss the one crucial step to building financial wealth.
This starts with saving.
People get scared by the word âbudgetâ because we assume it means you cannot live your life and must live with cockroaches in NYC to get by.
Not at all!
Everyone needs a budget to survive and track their spending accordingly. Without doing so, you would feel lost where your money is headed plus it can be fun to see how to optimize it if youâre a nerd like me!
Along with saving thereâs not so much that can go wrong if you stay bullish for the long term with stocks.
These are the 3 riskiest moves that you can make in investing:
-No diversifying and allocating your net worth only towards equities
-Private equity investing since hedge fund investing is less risky
-Stock picking through social media
Whenever you invest, itâs important to understand that you are taking risk.
No risk = No Reward.
The stock market isnât in your control.
It doesnât matter how much experience you have.
You will loose money and that will be the best lesson of all to improve.
If you donât want risk, then you cannot earn money.
Itâs that simple.
The mindset is key to pooling your money into funds.
If you want to spend hours each day tracking your intraday trades, be lured into volatility and go bonkers, be my guest and become a day trader but just as a heads up, most actively managed funds never or rarely beat passively managed funds.
Sticking to the long term through patience is key.
I know itâs hard to wait but itâs worth it in the end.
Now that you have the right mindset to understand that your hard-earned savings in the stock market could be wiped out by anything thatâs not in your control, letâs get started!
Top Investment Strategies
Actively Managed Funds
Overall, these funds underperform index funds as illustrated above. Even though Iâm 20 years old and should be more of a risk taker than I really am, Iâm not a fan of active managed funds mainly because of the high fees.
There is a high Portfolio Manger turnover which means youâre really betting on the money management skills of the portfolio manager and his/her analysts.
You could easily save yourself a couple thousand per month by trading yourself and win bigger through index funds or ETFs, not mutual funds.
These fees come in all shapes and sizes.
Some brokers charge you a fixed percentage of the average net asset value of the fund over the year others charge you a base fee of AUM (assets unde management) and others could be monthly or quarterly recurring. If you donât have time to invest yourself which I always believe everyone has itâs just a mater of priorities, you could save thousands to reinvest into the stock market just by being a lazy bum(read here).
You can check out how actively managed funds are rated at MoringStar.com or in Money Magazine to understand how managers pick the securities for their clients.
Target Date Funds
These funds allow retail customers to allocate their money into 1 specific target-date fund and simply forget about what their money is up to until they reach the target date for retirement.
The fund will be diversified for you in terms of stocks and bonds and you can choose to have the target date to retire for you.
Smart Indexing
Several indexes are market-cap weighted indexes for example the S&P 500 so if we go through a 5 year bull market run in industrials, stocks will account for a greater weighting of the industrials index than other sectors which is good momentum investors.
With smart indexing, you donât have to worry about not taking a slice of the pie in industrials during that time period. It aims to keep all sector weighting equal through the constant rebalancing so no sector can dominate unevenly.
Indexing
Last but not least, my favorite. This is a low-cost strategy where you pick a particular stock index to purchase through an ETF or mutual fund. Iâm investing in the most popular US index to follow which is the S&P 500 index through a Vanguard S&P500 Index fund, the VFINX. Or you can buy the ETF or SPY. Whichever one you prefer but compared to active fund management, as discussed above, index benchmarks can outperform them and youâll save on fees for the long erm.
Top Alternative Investment Strategies
I wanted to outline the above 4 investment strategies that are available for anyone in every stage of life. This is mainly for the domestic stock market but feel free to tap into international markets that are most likely valued more appropriately too through value stocks. The below strategies are for those who can tolerate more risk and work upfront to increase passive income streams later on.
Real Estate
Currently I own one studio apartment that I purchased at the end of 2020 when interest rates were still low before the 10-year crept up to now 1.35% and Millennials from the heartland of America were willing to take advantage of NYC when the pandemic shit.
You can read about how I found my tenant and the process here. Since 2020, Iâve been leasing out my apartment for $3500 to a close coworker. With little to no upfront work except for mini renovations and appliance changes, I was able to skip the broker fees and have a reliable tenant from my network come along.
Since he plans on staying for a couple years and is reliable, never misses his rent payment for the month, I plan on charging him the same rate. I believe any owner would prefer a reliable renter and keep the price the same then one that doesnât pay on time and doesnât want to be evicted because you charge them more.
In addition, my family has owned properties across the city and started investing when they moved here as immigrants in the 90âs. Real estate was far the best investment theyâve ever made and the prices in NYC have only rose in demand by 60% since the 90âs when the city was considered dangerous and dead at the time.
Also, Covid was free marketing for NYC and the real estate market as those who never thought they could afford the city have now flocked here!
Yet, it is understandable that not everyone has 300k+ to dish out on a property or the time to deal with maintenance, tenants, lawyers and a broker.
It can get costly and expensive quick.
Luckily, thereâs an alternative option thatâs not tangible: real estate crowd funding!
I have 2k invested in commercial real estate and multi-family properties in Florida and Georgia. Since real estate is a tangible asset that produces income, it is less volatile and I prefer investing it over dividend stocks for real capital growth because everyone needs a place to live!
Traditional Financial Advisor
At any age, it can be appropriate to hire a fiduciary to manage your assets and trade on your behalf through active management. Yes the fees are expensive and add up but if you donât have time to brush up on the market every month or so and always have FOMO, I would suggest hiring a financial advisor to allow you to have a peace of mind.
Thanks to technology, you can even hire a robo advisor under 1% a year on assets managed. I use Personal Capital to keep track of my expenses and plan out my future through their interactive accounts linkage system but they also offer free consultations and a brokerage service if interested.
Hedge Funds
Hedge funds are always risky business. But what isnât so risky is that they almost always produce a return just wipe out Melvin Capitalâs sticky situation with GameStop and AMC last month where they lost billions in value due to the short squeeze positions.
Hedge funds bring you absolute dollar returns in a bear or bull market. The only problem is that they are actively managed funds and the wealthiest people in the world are the fund managers which means that they have large minimums.
They charge mediocre fees from 1â2% of AUM yet they keep 20% of profits! Lastly, most have a minimum of $1m to invest with the fund in order to see big gains.
Private Equity
I worked at a private equity firm last summer and it was a splendid ride!
Private equity investing is where you invest your money in private companies who you think will grow and pay you a future dividend.
This is similar to Shark Tank just with more risk since these companies arenât past the preliminary rounds.
These companies typically need restructuring and private equity firms conduct competitive analysis, LBOs and DCFs to figure out future cash flow and burn rate to see if they will make you a solid return if they have some liquidity event.
Compared to venture or angel seed investing which is investing at the early baby stage of a companyâs growth, these are much more volatile. Private equity is with the bigger guys but as always keep your options open and know that you shouldnât invest more than 25% of your net worth in individual stocks.
There are many ways to build wealth and it starts with the right mindset, not balance. The one thing is for sure is that leaving all your savings in a savings account paying you 0.1% isnât going to help you build wealth.
Be wary that banks typically ask their clients to keep 10%-20% of their net worth in cash so they can reinvest it to make them a higher profit while it deflates for you. Yet, cash is still king just be wary of what banks do. At least equities and the stock market wonât loose you money over the long term as currency does.
Remember that the stock market always goes up. The hardest part is starting but itâs always the most rewarding. Stay consistent to build long term wealth so you can live off of your investments one day and get your time back.