The Best Investment Strategy For the Clueless

Your best investment strategy if you feel clueless could be the simple investment strategy or “rule of thumb” that’s been around for years. Here we explain the basics of this strategy, and then get into how to put it into action without stress or strain.

It’s nice to have a basic guideline to go by when managing your investments. Traditionally, the most basic guideline has focused on two things: the need for balance in an investment portfolio and the age of the investor. Simply put, your best investment strategy is a function of these two factors. Balance is a way to control risk while earning higher long term returns. The traditional approach to investment strategy focuses on owning both stocks and bonds to achieve balance, since losses in one of these investment options is often offset by gains in the other.

Age is taken into consideration because it is assumed that younger investors can afford to take more risk in pursuit of higher returns in order to accumulate a larger nest egg for retirement. After all, earning 5% a year $10,000 grows to $43,000 in 30 years vs. $174,000 at 10%. If you are young and experience a setback you’ve got plenty of time to make up for it. When you are older this is not the case – you need less risk, more safety, and income.

Stocks are the primary investment of choice for young investors, and over the long term have returned 10% on average per year. On the flip side, bonds are preferred by oldsters, and have returned 5% to 6% on average over the years at a lower level of risk. In putting together your best investment strategy the traditional question becomes: how much of each of these two investment options should you hold in your investment portfolio? Here’s the traditional rule of thumb.

You should allocate a percentage to bonds that is equal to your age, with the rest going to stocks. In other words, the best investment strategy for a 20-year old is 20% to bonds and 80% to stocks. At age 60, you want 60% in bonds and 40% in stocks; and at age 40 a ratio of 40% bonds and 60% stocks is your best investment strategy. That’s the rule of thumb that’s been around at least as long as I have, and I’ve been into investing for 35 years. There are no guarantees in investing, but keeping the above guidelines in mind should keep you out of major trouble over the long term.

Over time you need to invest more conservatively as you age, so you need to adjust your portfolio over time to reflect this. Now, how can average or even clueless investors set up their best investment strategy without picking the individual stocks and bonds to invest in? The simplest way is through mutual funds: bond funds, stock funds, or balanced funds. Mutual funds pick the stocks and/or bonds for you and handle all of the management details. In fact, the traditional balanced fund invests 40% in bonds and 60% goes to stocks.

Other balanced funds, like target funds and lifecycle funds, can be either more conservative or more aggressive in their asset allocation to the two primary investment options, stocks and bonds. If you really feel clueless, go with a balanced fund that fits your risk profile. The fund’s literature will describe how it ranks in terms of risk from high to low. Above all else, your best investment strategy is one that you feel comfortable with in terms of risk.

Leave a Reply

Your email address will not be published. Required fields are marked *