This article is the sixth in a series on personal finance and investing at different stages of your life. As some issues may overlap the different stages of life, they could be covered in a prior or subsequent article. For the full series go here.
You are in your thirties or forties, moving up to higher levels of income in your career. Your children are growing up and you are making good progress paying down liabilities such as the mortgage.
Overall, it's becoming easier to put money aside and invest for future needs, particularly retirement. Here are 10 financial tips to consider for this stage of life.
1. Build a retirement fund If you anticipate a shortfall in retirement income relative to your requirements, you may want to think more seriously about building up your retirement fund. The two main pathways are: a diversified portfolio with a high allocation to stocks, or a portfolio of safe, conservative assets.
The first approach has the higher expected return since stocks historically have been the best returning asset over the long run, registering an average 3- to 4-per-cent annual premium over bonds. But it comes with more volatility. "If you can tolerate some uncertainty, you can likely fund your future goal with significantly less savings," notes Christopher Jones, author of The Intelligent Portfolio .
The second approach has lower returns but comes with lower volatility through time and in final outcome. "The only way to be more confident of reaching a financial goal is to invest more conservatively and save more," Mr. Jones explains. Moreover, if you need only "a modest rate of return to reach your goal, it's unnecessary to take on the risk of a large stock weighting," suggests Warren MacKenzie of Weigh House Investor Services.
2. Taking stock Many investors use bonds and other assets to smooth out the ups and downs of the stock market. "We know that by simply changing our allocation between stocks and bonds, we can lessen the amount of volatility in our portfolio until we reach our comfortable sleep level," writes Taylor Larimore, Mel Lindauer, Michael LeBoeuf and John C. Bogle in The Bogleheads' Guide to Investing .
Some individuals are comfortable with placing their portfolio entirely into stocks. Excluding money needed within three years, this is the option chosen by Michael J. Wiener, author of the blog Michael James on Money. He doesn't need other assets to smooth out the volatility of stocks because he's confident he can stay focused on the long term.
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Other investors seek to hedge against the possibility of long-run returns not panning out as advertised. "Invest as if stocks are likely - but not certain - to beat all other assets. Keep some money in bonds, cash, and real estate just in case they do better," recommends Jason Zweig in The Little Book of Safe Money .
3. Be lazy When it comes to investing in stocks, numerous studies and financial scholars have found that it's best to avoid picking stocks and timing markets. "Accept the fact that you are unlikely to beat a market where prices are set by the consensus of thousands of professionals and where you have to pay a steep price for every attempt," warn Greg Baer and Gary Gensler in The Great Mutual Fund Trap .
And don't bother with stock tips, say seasoned investors. The blogger at Thicken My Wallet recounts: "I bought too many penny stocks when I first started investing, based on recommendations from friends. Do not rely on other people's recommendations." And Doug McLarty, managing director of accounting firm McLarty & Co. in Ottawa, discloses: "I made a number of mistakes when I started. I expected to beat the market with hot tips … Eventually I learned the hard way."