5 things to consider before making an investment.
This article originally appeared on LearnVest.com.
If you were getting ready to go out for the evening, would you ask yourself what you planned to wear without thinking of where you were heading? Of course not, because the clothes you’d wear to shovel snow would be very different from those you’d wear to a wedding.
The answer to the question, “How should I invest?” is often given a one-size-fits-all response when it’s anything but. To protect yourself, here are 5 things to think about to make sure your hard-earned money is invested appropriately.
1. When Do You Need to Spend That Money?
If you’ll need to access this money again within the next five years, you’ll typically want to protect that money against inflation by putting it in savings accounts, money market funds or accounts, or CDs, rather than taking on market risk that stocks or bonds.
2. Do You Have Any Outstanding High-Interest Debt?
If so, paying off that debt may be the best investment you can make, as it gives a “guaranteed” return—especially when interest rates on savings vehicles are so low.
3. How Steady Is Your Income?
A professor with tenure may feel more comfortable taking higher short-term risk than an entrepreneur with variable cash flow.
4. How Old Are You?
The older you are, the less time you have on your side to bounce back from volatile markets, so the more conservative you’ll want your portfolio to be. For women, a rough rule of thumb is to take 110 minus your age to arrive at the ideal maximum percentage of your portfolio in stocks. For example, if you’re a 40-year-old woman, 110 minus 40 equals 70. So, up to 70 percent of your portfolio could be in stocks and 30 percent in bonds (for men, use John Bogle’s oft-quoted 100 minus your age…because men generally have shorter life spans).
5. Are You Actually Interested in Investing?
Unless you are inherently passionate about picking individual stocks or studying active money managers, I love target-date retirement funds or low-cost index funds and exchange-traded funds (ETFs). My favorite basic “portfolio recipe” comes from Boglehead Mel Lindauer. His recommendation: For the percentage of your portfolio devoted to stocks, put half in a total U.S. stock market index and half in a total international index. For the portion that goes into bonds, put half in a total U.S. bond market index and half into Treasury Inflation Protected Securities (“TIPs”) via funds, ETFs, or direct purchases. From there, you can add some additional investment spice in the form of REITS or commodities, but for most people, this core recipe will do just fine.
Bottom line: Always remember that before anyone can give you meaningful investment guidance, they need to understand where it is that you specifically want to go.