A Guide to the Best Investment Strategies at Every Age

Even the best portfolios need tweaking over time.

Successful investing takes more than just setting aside money every month. You have to understand both your investment objectives and your risk tolerance — aka how much of an investment loss you can potentially sustain. Equally important is understanding how those characteristics change over time as you grow older. With risk tolerance, in particular, investment decisions you make in the earlier stages of your life become much more conservative as you reach your 50s and beyond. As long as you have a grasp of these essential concepts, you can begin developing investment strategies and asset allocation by age that will help you reach your financial goals. 

Depending on where you are in life and asset knowledge, you may want to skip ahead:

What Types of Assets Are There?

Assets are tools that you can use to invest and grow your money. Different types of asset classes are available that can be categorized in innumerable ways — from how they provide a return to their inherent risk characteristics.

For example, the broadest categories of investment assets are growth and income. A growth asset provides its return by potentially growing in value, such as with a stock. An income asset typically doesn’t grow in value but rather generates a return by paying out income to investors, such as with a bond or CD. 

Assets categorized by their risk characteristics are generally classified in a range from conservative to moderate to aggressive. While conservative assets tend to offer the lowest potential return, they’re also the least likely to lose money. Aggressive assets, on the other hand, sit atop the risk/reward profile, offering potentially high returns in exchange for a greater risk of loss. 

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Here’s a look at the characteristics of some of the more popular types of investment options. After that, you’ll find out how you could integrate some of these options into your personal portfolio based on your age and risk profile.

Read: How To Pick the Smartest Investment Strategy for Your Money

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Index Funds

A passive investment that tracks the ups and downs of an underlying index is an index fund. One of the most commonly tracked investment indices is the S&P 500 index, which is what many investors refer to as the stock market. Index funds are low-cost ways to get direct exposure to the market, which is a growth investment higher up on the risk/reward scale. 

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Mutual Funds

Mutual funds are collective pools of money invested by professional money managers on behalf of individual shareholders. Mutual funds cover essentially any asset class or risk profile you can imagine — from general stocks or bonds to high-risk biotech investments or low-risk government funds. 

Compare: Index Funds vs. Mutual Funds: Which Is Best?

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Exchange-Traded Funds

Exchange-traded funds trade on an exchange, like a stock. However, ETFs hold multiple investments, like a mutual fund. ETFs are often passively managed index funds tracking sectors of the market, such as the S&P 500 index. But some are actively managed, like traditional mutual funds. ETFs are generally low-cost investments but can be high- or low-risk, depending on the investments they hold.

Learn: ETF vs. Mutual Funds: Same Objectives, Different Methods

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Stocks

Although stocks, in general, are higher on the risk/reward spectrum than say, U.S Treasury funds, there are certainly some stocks that can be classified as riskier than others. For example, a brand-new biotech company that only has a single, speculative product in development and no history of sales will usually be more volatile than a so-called “blue chip” stock like Coca-Cola, featuring over a century of history and consistent dividend payments. 

Learn: How To Invest In Stocks: A Beginner’s Guide

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Bonds

A bond is an income investment. If you buy a bond at its face value, which is typically $1,000, you’ll receive that money back when the bond matures, which can be anywhere from a few months to a few decades. Along the way, you’ll receive regular interest payments, which are typically paid twice per year but might be more frequent. Bonds are on the lower end of the risk/reward scale overall, but individual bonds can be more or less risky depending on the financial strength of the issuing company. 

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401(k) or 403(b)

A 401(k) or 403(b) is one of the best types of investments you can take advantage of, because you receive tax benefits and, in some cases, free money. They function as retirement plans that you can open via your employer and invest in mutual funds or other investments within. Contributions go in tax-free, and assets grow tax-deferred until you withdraw your money in retirement. Along the way, your employer may match a portion of your contributions, hence the free money. For 2020, 401(k) contribution limits have been raised to $19,500, plus an additional $6,500 if you are age 50 or older. 

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Roth IRA

Another investment account with tax benefits is a Roth IRA. Instead of getting a tax deduction for your contributions, however, you can withdraw from your account in retirement tax-free. Roth IRAs are usually self-directed, meaning you open them up yourself with a broker rather than taking advantage of one offered by your employer. Within a Roth IRA, you can usually choose any type of investment you’d like, from stocks and bonds to index funds and mutual funds. 

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Real Estate

Real estate can be a very involved type of investment, especially if you are talking about owning homes or rental units. One option for real estate investors is a real estate investment trust, or REIT, which packages various types of real estate portfolios, sort of like a mutual fund, and trades on the stock exchange. Real estate of any type can be a useful diversification tool, as real estate prices don’t move in lockstep with stocks or bonds. 

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High-Yield Savings Account

A high-yield savings account is an FDIC-insured investment that is very safe but offers a high APY in comparison to traditional savings accounts. Many online banks and fintech companies offer yields of 1.5% APY or more in the current environment — far above the 0.1% APY offered by many major banks. 

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Money Market Account

A money market account is another form of cash alternative that can be a safe place to earn a modest return on your investments. True money market accounts also carry Federal Deposit Insurance Corp. — aka FDIC — insurance and can pay yields comparable to some high-yield savings accounts. These are conservative investments that keep your money safe while earning you a small amount of interest. 

Read: How Much You Should Have in Your Retirement Fund at Every Age

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Best Investment Strategies in Your 20s

When you’re in your 20s, you can afford to take on the most risk in your portfolio. You have time to recover from any big losses. Remember that the stock market regularly sells off by at least 10%, at a frequency of more than one occurrence every other year in recent history, and occasionally drops by 20% or more. In the bear market of 2007-09, for example, the S&P 500 sold off by 56.4%. 

The good news is that the stock market has always mounted a recovery. Sometimes, it may take a few years until the market makes new highs, but historically it always has, as evidenced by the fresh new highs reached in December 2019. Even if you invested right before any past market crash of 10%, 20%, or even more, you’ve still made money on your investments if you held on until now. In fact, bear markets, which are marked by market selloffs of at least 20%, only last for an average of 17 months. 

Some investors, however, don’t have the time to hold on for years to earn back their losses. Fortunately, as an investor in your 20s, time is on your side. You can afford to be more aggressive with your investments because even if you have a big loss, over time, you should be able to gain your money back and then some. At this age, you can even afford to take on the risk of choosing stocks, even as a beginner — as long as you get good advice and understand the risk involved.

So an investment strategy for your 20s — when retirement might be over 40 years away — should tilt to the aggressive side. Investment manager Charles Schwab recommends something approximating this:

  • Large-cap U.S. stocks: 50%
  • Small-cap U.S. stocks: 10%
  • International equity: 25%
  • Diversified emerging markets: 5%
  • Real estate: 5%
  • Short/intermediate-term bonds and other cash equivalents: 10%

You can experiment with finding the best balance between picking your own stocks, using highly rated investment apps or following the advice of a money manager at this stage. Of course, at this age, you should also be investing at least a portion of your money in any tax-advantaged retirement plans you can, such as a 401(k), 403(b) or Roth IRA. 

Learn More: Stock Trading: A Beginner’s Guide to the Markets

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Best Investment Strategies in Your 30s

In your 30s, you’re generally starting to earn more money, but you’re likely years away from your retirement date. At this stage, you can afford to continue being more aggressive, and you stand to make great gains in your portfolio because you should be able to sock away more money than when you were in your 20s. Schwab’s models suggest an allocation somewhat in line with this:

  • Large-cap U.S. stocks: 45%
  • Small-cap U.S. stocks: 10%
  • International equity: 15%
  • Diversified emerging markets: 5%
  • Intermediate-term bond: 15%
  • Real estate: 5%
  • Short/intermediate-term bonds and other cash equivalents: 5%

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Best Investment Strategies in Your 40s

In your 40s, you’re nearing your peak earning years, so you should be maxing out your 401(k) or 403(b) plans, if at all possible. Overall, you’ll need to keep an eye on your asset allocation, because although you’ll still have a decade or more until you retire, you still don’t want to take on undue risk. At this stage of your life, it can be particularly important to work with a financial and tax advisor to maximize your investment strategy and optimize your asset allocation.

According to the Schwab model, a sample allocation with about 15 years until retirement might look something like this:

  • Large-cap U.S. stocks: 45%
  • Small-cap U.S. stocks: 10%
  • International equity: 15%
  • Diversified emerging markets: 5%
  • Intermediate-term bond: 15%
  • Real estate: 5%
  • Short/intermediate-term bonds and other cash equivalents: 5%

At this age, portfolio management starts becoming even more important. The delicate dance of risk and reward becomes paramount as the time until you need your money becomes shorter.

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    Best Investment Strategies in Your 50s and Into Retirement

    If you’ve invested successfully, once you reach your 50s, retirement may be in plain view. In this case, it makes sense to dramatically downshift the risk in your portfolio so that you don’t lose your nest egg right before you need it.

    The Schwab target-date model suggests an allocation approximating for this with 5-10 years left until retirement: 

    • Large-cap U.S. stocks: 40%
    • Small-cap U.S. stocks: 5%
    • International equity: 10%
    • Diversified emerging markets: 2.5%
    • Intermediate-term bond: 30%
    • Real estate: 2.5%
    • Short/intermediate-term bonds and other cash equivalents: 10%

    For your short-term/cash-equivalent investments, money market accounts, CDs and high-yield savings accounts can all be good options.

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    Getting Help With Investing at Every Age

    No matter what stage you’re at with your investments, it can be a good idea to at least speak with a financial advisor, particularly at one of GOBankingRates’ Best Brokers. The most reputable advisors will offer you at least a free consultation and give you insight into their opinions on your options. If you can develop a good relationship with an advisor over time, their advice can be invaluable as you age and need to adjust your investment portfolio. Remember to seek out a Certified Financial Planner so that you can ensure your advisor has a fiduciary duty to work in your best interests. 

    Next Up: How To Find the Best Financial Advisor for You

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    About the Author

    After earning a B.A. in English with a Specialization in Business from UCLA, John Csiszar worked in the financial services industry as a registered representative for 18 years. Along the way, Csiszar earned both Certified Financial Planner and Registered Investment Adviser designations, in addition to being licensed as a life agent, while working for both a major Wall Street wirehouse and for his own investment advisory firm. During his time as an advisor, Csiszar managed over $100 million in client assets while providing individualized investment plans for hundreds of clients.