At the moment we receive the first paycheck of our lives, we should think about saving and investing a portion of it. How to do it, why we shouldn’t hesitate making this decision, and how to change the invested funds structure with the development of our professional career over the years - says Bartosz Grejner, Cinkciarz.pl financial analyst.
Not every investment is suitable for everyone, just as not every time is good for just any investment. A better understanding of when and where to invest your money will enable you to avoid problems and allow you to receive more capital.
Early career, age 20-29
This is usually when we take our first permanent job or start our own business, and this time is often spent thinking about starting a family, as well.
This also marks the time when we should begin developing good money-management habits in order to invest some of our income to ensure a better future. It is a huge advantage to begin our investments during this stage of our lives. Because it is really in our careers, and we have more time before retirement, we are potentially much more resistant to the crises occurring within markets or business cycles. Therefore, by selecting investment products - a good idea might be to create an investment wallet which will largely consist of shares - the percentage of the wallet can depend on us. The greater our willingness to take risks, the greater the percentage of shares (or equity funds) should be.
When selecting individual companies or equity funds, it is worth considering whether to make an investment in blue chips, i.e. shares of potentially the largest and most stable companies which are the part of the biggest stock indexes - e.g. WIG20 in Poland, Dow 30 in the USA, or to make our investments in medium or smaller companies' shares, which are characterized by a slightly larger potential increase in value.
The choice is not easy, as there are many stocks and stock funds. Basically, everything depends on individual goals, the time horizon and the aforementioned risk tendency. If we exclude the above-average risk aversion and excessive tendency toward taking it, it is safe to assume that our wallet will be filled with a combination of relatively safe blue chips, shares of companies paying cyclic dividends with relatively limited growth rates, and the shares of medium and small companies showing the highest growth potential. We can also select suitable investment funds, however, making sure to differentiate them to minimize the risks associated with the people who manage them. Ideally, the stock or funds and, in principle, any of our investment subjects, should be as varied as possible. By doing this, we can limit the entire project failure margin.
Professional development and career peak, age 30-49
The years in which we begin to increase our wages - the purchasing power of our wages is also likely to increase, so we are able to save more. If we invested earlier in life, we should be seeing the effects. We probably still have a few decades of professional activity ahead, so there is still a relatively long time for the invested capital to “work” for us. Hence, our investment objectives may continue to be geared primarily to increase value. However, the idea of protecting our capital or protecting profits from our investments should be at the forefront of our minds. Therefore, our possession of the most risky assets (e.g. shares, funds) in our investment wallet should decrease slightly in favor of relatively safer ones (e.g. bonds). What proportions are most beneficial? This is definitely based upon individual cases, but in general, it is useful to apply a practical principle that can be adopted for the level of output "100 minus age." To conclude, the investment wallet of a 50-year-old should consist of only half more risky stock. In a similar theme, equity funds exchange should also occur during this time.
Close to retirement, age 50-75
This is the period in which the preservation of capital is slowly starting to play a key role. At this age, we should be thinking about a plan and a timetable in which to withdraw our investment profit gradually. We should reduce the share of stocks in favour of bonds over time. Among the remaining stock, blue chips and companies which pay regular interval dividends, should gain the dominant share. This is the moment in which generally, step by step, we should cast the relatively riskier stocks of small and medium companies out. However, we should not completely give up on the risky assets, stocks or funds. The biggest enemy during this period of life may be inflation, which will not necessarily be handled by bonds and placings. It in turn will reduce our capital purchasing power.
In developing the withdrawal strategy from our investment plan, we must also recognise if the currency will cover our expenses (including planned holiday trips). Our investment purchasing power may reduce if it is denominated in a different currency. Therefore, it is important to secure ourselves against this by exchanging currency in advance and eliminating the risk of exchange rate spikes which, in extreme cases, make life difficult.
Regardless of whether we are 20 or 40 years old, let’s not put off the decision to invest. The sooner we start managing our money wisely, the more time we have to our advantage by offsetting the impact of crises, politics and easing business cycles. Let’s remember that our investment approach should mature with us.
