Some say I'm taking a risky approach to saving for retirement by putting 100% of my money in stocks, but I think my strategy will pay off in spades
- On my 30th birthday, I finally started investing for the first time.
- I opened an investment account with Vanguard with the goal of saving for retirement. Conventional wisdom recommends that someone my age allocates 30% of their portfolio toward bonds and 70% toward stocks.
- I decided to invest 100% of my portfolio in stocks. I'm getting a late start and starting out with only $10,000, so I want to invest as aggressively as possible.
- I also have multiple streams of income and plan to live longer than the 78- to 82-year life expectancy that conventional wisdom is based on, so I'm willing to shoulder more risk.
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When I graduated from college and got my first real job, I knew I should start saving for retirement right away. Unfortunately, I didn't.
In fact, I didn't start saving for retirement or investing my money until I turned 30. Better late than never, right?
Luckily, I still have a pretty long time horizon until I reach retirement age. I recently opened my first investment account, with Vanguard, and I had to decide how I wanted to allocate my assets. Contrary to popular advice, I chose to invest 100% of my portfolio in stocks, at least for now.
Conventional wisdom on asset allocation for retirement
One of the first decisions you have to make when you choose to invest your money is how to allocate your assets. You'll also have to continually adjust your asset allocation as you age.
Put simply, asset allocation is how you split up your investments between stocks and bonds (and perhaps short-term reserves like cash and CDs). When I opened an investment account with Vanguard in order to invest the $10,000 I'd saved up for that purpose, I had to decide how much I wanted to spend on stocks and how much I wanted to spend on bonds.
A balanced retirement portfolio should include both stocks and bonds. Stocks are more volatile but provide higher average returns over the long-run, while bonds generally remain more stable but don't provide huge returns. For that reason, it's recommended that you start with mostly stocks when you're young, and gradually shift your assets toward bonds as you approach retirement age.
The rule of thumb for allocating your assets is to subtract your age from 100. This number is the percentage you should allocate toward stocks, and the rest should go toward bonds.
Because I was 30 when I started investing, following this advice would've meant putting 70% of my assets, or $7,000, into stocks, and 30%, or $3,000, into bonds, and then splitting up successive deposits accordingly.
Why I decided to forgo conventional wisdom and invest 100% of my portfolio in stocks
Of course, as with any rule of thumb, there are exceptions, and I decided that I was one.
I chose to invest 100% of my retirement portfolio in stocks for the time being.
Not only do I still have a long time horizon (20+ years) until I hit retirement age, but I'm also just getting started from scratch and feel a little behind. I also don't have a lot to lose. If I were investing $100,000, I wouldn't be so quick to put it all in stocks. But given that I'm only investing $10,000, I feel comfortable shouldering more risk for the prospect of a higher reward.
I also expect to live longer than the median life expectancy that conventional wisdom was based on (78 to 82 years old). That's the life expectancy today, but there's plenty of science suggesting that those of us currently in our 20s and 30s will live significantly longer, giving my portfolio more time to recover if (or when) stocks tank.
Another reason I'm okay with putting so much money into stocks is that I have multiple streams of income and plan to continue diversifying my income. This means that I won't be fully reliant on my investment portfolio for income in retirement, and again, can shoulder a bit more risk.
My plans for my retirement savings in my 30s and beyond
As my investment account grows and I get older, I will start shifting some of my assets toward bonds. My plan is to keep aggressively dumping all of my disposable income into my investment portfolio in order to catch up, placing all of it in stocks for now.
Within the next couple of years, I'll adjust my portfolio until I've allocated 90% in stocks and 10% in bonds. By the time I'm 35, I hope to be approaching $200,000 in my portfolio and have it invested 80% in stocks and 20% in bonds. I'll keep that asset allocation until my 40s, at which point I'll continue shifting more assets to bonds.
My situation is unique in many ways, but I do believe we'll start seeing more people taking this approach to investing in their 20s and 30s. Thanks to longer life expectancies and the increasing accessibility of multiple streams of income, this investing style makes sense for a lot of people my age.
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