Ages and Stages Approach to Investing

Investing--these days, it seems everyone is investing or at least talking about it. While every investment has its advantages and drawbacks, a crucial point to remember is that one person's great investment can be completely wrong for someone else. Initially, this concept may be hard to grasp. After all, isn't it true that if an investment is making money it's a good one? If only it were that uncomplicated. Before you study the different vehicles you can invest in and decide which ones are right for you, you must examine what point of your life you are in and pinpoint, ether broadly or in some cases, quite specifically, what you're investing for.

Warning While we can provide suggestions of the types of investments that are typically appropriate for different ages and stages of life, we couldn't possibly hope to include or exclude the right or wrong investment for everyone at a specific time of their lives. Our aim is to provide you with all the objective information you need to make informed investments that will enable you to reach the goals you've set. Your particular situation may require that you think outside of the box when it comes to choosing vehicles to invest in. We're here to provide you with the information you need to make an educated choice.

When implementing an investment plan, the first factor you must consider is the risk level. Generally speaking, the riskier an investment is, the higher its expected return will have to be in order to entice investors. Determining how much risk to accept in your investment portfolio depends on two broad factors:

• What are the inherent risks of the particular investment?
• How able and willing are you to deal with these risks (this factor is known as "risk tolerance")?

When you evaluate the level of your personal risk tolerance, here are a number of things that you will want to consider:

• Family situation. A stable marriage and good health may allow you to assume a bit more risk than if you are contemplating a divorce or separation or are experiencing the physical, mental, and economic effects of health problems.
• Age. In general, the older you are, the less risk you may be willing to tolerate, since you are closer to the time when you may need to start living off your investment fund income (and possibly principal), and have less time to overcome the impact of investment "mistakes."
• Business/employment situation. A sufficient and stable stream of personal income provided by your business, outside employment, or spouse's income can go a long way toward giving you the flexibility to go for higher-return (and more risky) investments. For example, if your spouse has secure employment that provides a salary, and employer-provided medical and retirement benefits, you might feel freer to go for more risky investments than you would if your paycheck were the only source of your family's income.
• Debt and liquidity. If you have a comfortably large fund of cash and other liquid assets to get you through a financial emergency, you probably will feel more prone to accept more investment risks than if you didn't have such a fund, or if you were burdened with a high level of debt.
• Other investments. If you already have fixed-income and/or other conservative investments, you may be better suited to assume more risk than if you are currently heavily invested in high-risk investments.
• Insurance. Investment risk is not the only risk you face; you are confronted with risk of loss because of accident, ill health, disability, and premature death. If you have adequate insurance to indemnify yourself or your family on the occurrence of these risks, you have less of a need to have a large "self-insurance" fund of liquid assets. Because of this, you may feel free to move to higher return, higher risk investments.
• "Just you" factors. This is last on the list, but certainly not least important. Despite what anyone tells you about the safety and return of an investment, you have every right to take a pass on any investment that unduly raises your anxiety levels. No matter how safe an investment may be from an objective viewpoint, or how much income it may generate, you probably won't find it worth it if worrying about it threatens your health.

Financial Calculators Use this emergency savings fund calculator to determine how much you should set aside to cover periods during which you have reduced or no income

Once you've assessed the risk factors for your age and stage of life, keep in mind that investing can only be successful if you monitor your investments and any direct or indirect changes that will affect them. Just like the ages and stages of your life will change, with them your investments will change as well.

Changes having a direct monetary effect. Some changes will have a direct and immediate monetary effect on your financial plan. Such changes include:

• The cost of your goal increases or decreases.
• Your ability to make the required savings to reach your goal increases or decreases.
• The yield (interest, dividends, and capital gains) on your savings or investment increases or decreases.
• You need (or want) to change the time for attaining your goal.

You have to expect that any of the first three items will change somewhat over time. When we talk about changed circumstances within the context of amending your investment plan, we mean changes that are large enough to potentially affect whether you will achieve your goal or not.

Changes having an indirect monetary effect. In addition to those changes that have a direct monetary affect on your financial plan, there are changes that affect your investment plan less directly.

These indirect effect changes may be just as important as the direct changes, but with the added complication that you may be less likely to think about their connection to the investment planning that you have done. After all, if the cost of your goal itself goes up, once you discover this, you'll know that your plan should be checked to see if you need to modify the plan in some way. But more indirect changes, like the following, may escape your attention:

Tax law changes. Changes to the federal income tax, in particular, can have a major impact on your investment plan. If, for example, the tax rates go up, you may well have to count on increased savings or increased yields to make up for the additional money lost to the tax collector.

The economy. Significant changes to how the U.S. economy is functioning quite likely will affect your plan. A general rise in interest rates, for instance, can be expected to drive down the value of your fixed interest rate investments, making it necessary for you to increase your savings or increase your investment yield (something that should be less difficult because of the climbing interest rates). A general decrease in the interest rates will likely increase the value of your fixed interest investment, but will make it more difficult to maintain your current yield on future investments.

Personal family changes. This category is probably hardest to get a handle on, since any number of changes to your family situation may have a great impact on your investment plan. However, this category is also the driving force behind what makes your investment choices unique to you. No list can contain all of the things you should watch for, but the following list includes some of the most common factors:

• new children (by birth, adoption, or by marriage), new grandchildren, nieces or nephews
• changes to marital status: divorce, separation, remarriage
• health problems suffered by you or your family members
• job or business changes that significantly change your current income
• sudden wealth (such as by inheritance) and sudden financial reverses (such as from a legal judgment)
• your disability or death (or the disability or death of family members or business partners or associates)
• changed educational plans for your children or grandchildren

Many of the personal family changes above will result as a natural process of the ages and stages of your life. However, they may also occur when you least expect, necessitating a change in your investment plan.

Diversification. Last, but certainly not least, a general rule that has been proven time and time again is that a diversified group of investment holdings is your best protection against investment disaster. A diversified investment portfolio embodies that old saw that warns you against "putting all your eggs in one basket." It may be tempting to invest everything in what looks like a sure bet. Please resist the urge. By having several kinds of investments, such as stocks, bonds (government and corporate), real estate, and precious metals, you greatly reduce the chance that a particular economic or legal change will devastate your investment fund.

Now let's take a walk through what we call the ages and stages approach to investing. While everyone is different, there are certain investments that the majority of people in specific ages or stages of their lives will need to at least consider as investment vehicles. In this section we try to narrow down the types of investments that in all likelihood will be appropriate at the different ages and stages of life. A different section will provide definitions and explanations of what these investment vehicles actually are and how they work.

Financial Calculators Use this Asset Allocator Calculator to help create a balanced portfolio of investments. Your age, ability to tolerate risk, and several other factors are used to calculate a desirable mix of stocks, bonds and cash. The calculated asset allocation is a great place to start your analysis in building a balanced portfolio. Click on the "View Report" button for a detailed look at your results.

The various lifecycles are as follows:

• When Time Is On Your Side: The younger years.
• Midlife Age or Stage: When you are chronologically or by situation in your midlife years.
• Almost Ready to Retire: When your next big milestone is retirement.
• Retiring in Comfort: Reaping the rewards of your pre-retirement investments.
• Your Investments After Death: The investments you leave behind.

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