A Woman's Guide to Savvy Investing: Everything You Need to Know to Protect Your Futureby Marsha Bertrand
According to research, women are often "better" investors than men. This easy-to-read guide shows women how to tap their own money-making potential and take care of their financial needs on their own. Women can make money--lots of it! This guide shows how. 224 pp. Pub: 9/97.
- AMACOM Books
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- 5.98(w) x 9.01(h) x 0.91(d)
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"Relating the Cycles of Our Lives to Investing Life-Cycle. Investing Pennies do not come from Heaven. They have to be earned here on Earth."
Margaret Thatcher, British politician and Prime Minister,
Sunday Telegraph (1982)
A group of women were talking about retirement and whether they'd have enough money to retire to the lifestyles they were accustomed. Most were discussing the investments they had stashed away during the past several years that they hoped would generate enough money to fund their senior years. One woman had an interesting concept: "My retirement fund," she chimed in, "is my husband's life insurance policy." It's true that men have a shorter life span than women, but it's probably not wise to depend on having your husband keel over, collecting his life insurance money, and using that for your retirement. Just in case the old guy remains healthy, you need to make a few backup plans to ensure that you have a comfortable retirement. And that means you have to plan for it your whole life.
This chapter looks at life-cycle investing, which is based on proper asset allocation, or the determination of how your investment portfolio should be divided between stocks and bonds. Asset allocation allows you to combine investments that have higher risk and lower return with those that have lower risk and higher return, thereby reducing your portfolio's overall risk while still offering you the potential for higher return. The mechanics of making those investments will be explained in Chapters 13 and 15, but right now I want you to focus on thefact that how you invest depends on where you are in your life. According to a 1995 Merrill Lynch & Co. study, a single woman at age 35 earning $50,000 a year should have $34,620 in savings to be on track for a comfortable retirement at age 65, if she works for a company that will provide her with a pension. If she doesn't, she needs $55,180 socked away by age 35. By contrast, a single man of the same age and income needs only $2,990 saved now if he is eligible for a pension, and $16,690 if he is not.
Why this huge disparity? Women live longer than men and therefore have to fund a longer retirement period, and they typically earn less during the course of their working years. That means that saving money for retirement and investing it well is extremely important for you. Following a strategy that can help you make the right investment decisions during the various stages of your life is the key.
Your AgeOne of the first questions a stockbroker should ask is your age. While we have the notoriety of typically not wanting to give out that piece of information, this is the one time you should "fess up." Are you 22 and starting your first job; or are you 40 and at least 20 years from retirement; or are you 60 and close to retiring? Where you are in your life is an important consideration when determining how to invest your money. It's called life-cycle investing, which is a method of matching your investments to your current needs. The key is to look at the relationship between risk and return, relative to your time horizon. If you have a short time horizon (retiring in, say, 5 years), you don't want to take a lot of risk; if your time horizon is longer (say, you're 35 years from retirement), you can afford more risk because you have time to earn additional money to offset any year in which you might have a setback. Typically, financial advisers look at three separate stages of life: the accumulation stage, the transition stage, and the retirement stage.
Accumulation Stage (Ages 20 to 45) During the accumulation stage, most people are working and accumulating the bulk of their assets. Your risk tolerance is high because you still have many years to work. If you make a mistake (and we all do) and lose a little money (and we all do), you have time to make it up before retirement. Therefore, you can invest your money fairly aggressively. The investment to turn to is stocks. Although stocks carry a fair amount of risk, they can also generate higher returns than most other investments. At this stage you should have 70% to 80% of your investments in stocks. Your best bet is to split your stock portfolio evenly between small-growth stocks (those of small, fast-growing companies) and conservative-value stocks (those of large, well-established companies). You can purchase either individual stocks or stock mutual funds, but whatever you choose to buy, diversification is important. If you plan to buy individual stocks, you need at least 10 or 12 different stocks of companies in various industries. The money required to do that can be fairly substantial$30,000 minimum. If you don't have that much money available for investing, it may be better to turn to stock mutual funds. The remaining 20% to 30% of your investments should be in bondsindividual bonds or a bond mutual fund, depending on the amount of money you have to invest.
Transition Stage (Ages 45 to 60)Remember, the transition stage is the time when you get betternot older. You're wiser and more mature (and wondering just how you got to this age so quickly), and you're probably at the peak of your earning ability. In addition to the fact that you're earning more, your expenses are probably diminishing. If you've had children, by the time you reach the latter half of this stage, they'll probably be gone and finished with college. And you may even be near the end of making mortgage payments. Therefore, you'll probably be able to save quite a bit of money now. Your time horizon is a little shorter, though, which means your risk tolerance is a little lower. It's time to switch some of your funds into different types of investments. You'll probably want to reduce your stock holdings to represent 60% to 65% of your total investment portfolio. It may also be wise to rearrange the types of stocks you own so that you have more value stocks than small-growth stocks, making your stock portfolio a little more conservative. In your bond portfolio, which you should increase slightly to 35% or 40%, you may want to consider shifting your money into tax-free bonds or tax-free bond mutual funds. That's because you're in your peak earning years, and your income, and therefore your tax rate, are at high levels. If you are at the highest of tax brackets, tax-free investments are a good bet. You may as well keep as much as you can for yourself, and let Uncle Sam worry about his own retirement.
Retirement Stage (Ages 60 and Above)When you reach the retirement stage, it's time to quit that job and enjoy yourself. According to life expectancy tables, you probably have at least another 20 to 25 years to live. Since you won't be working, you have to make that retirement money work hard for you to generate enough income. Many times retirees are so concerned about the safety of their money that they switch all their investments to bonds. Certainly bonds are safe and should definitely represent the largest part of your portfolio. But stocks can still have a place too. Reduce the stock portion of your portfolio to 30%, and move to stocks that are conservative, such as large-value stocks that pay good dividends or utility stocks. The remaining 70% of your portfolio should now be invested in intermediate- to short-term (1 to 10 years) bonds. Whether you stay with tax-free bonds or taxable bonds depends on your tax situation. No matter which life-cycle stage you're in, if you haven't started investing for your retirement, start now. Take advantage of any retirement plans that are available to you. The sooner you start, the better. But starting late is better than never starting at all. Matching Investments to Risk Because life-cycle investing is rooted in the rule of thumb that the more time you have to save, the more risk you can afford in your portfolio, the key is to understand which investments offer the amount of risk your portfolio can tolerate in each stage. Figure 1 shows a pyramid recapping the three life-cycle stages and the types of investments you should consider at each level. The key to life-cycle investing is managing the amount of risk in your portfolio at each life-cycle stage. The makeup of the investment portfolio at the bottom of the pyramid offers less risk. As you move up the pyramid, both the risk and the reward of the portfolio increase. As you read this book and learn about the various types of investments that are available, I will continue to refer back to this concept of life-cycle investing. It's important to keep in mind which life-cycle stage is appropriate to your age and focus on the investments best suited for your specific portfolio. Constantly monitor your investments and adjust them to your age and your willingness to accept risk. With just a little planning and saving, life-cycle investing will guide you to a financially sound retirement lifestyle.
Figure 1. Life-cycle investing.
Level 1: Accumulation Stage
(70%-80% divided equally between conservative-
value and small-growth stocks and 20%-30% bonds)
Level 2: Transition Stage
(60%-65% value and growth stocks,
but more heavily weighted with value stocks,
and 35%-40% bonds)
Level 3: Retirement Stage
(Ages 60 and above)
(30% conservative-value or utility
stocks and 70% bonds)
Terry Savage Author of Terry Savage's New Money Strategies for the 90s Nationally syndicated Chicago Sun Times personal finance columnist.
In investing, age is important at both ends of our lives. If you start investing early, your money does a lot of the heavy lifting in terms of giving you financial independence when you're older. I often tell the story of Mary and Tom. At age 25, Mary started saving $200 a month earning 9%. At age 65, she had put away $96,000; with compounding over time, her account was worth $849,930. Tom didn't bother to start saving until he was 45, when he began saving $400 a month earning 9%. At age 65, he had put away the same $96,000 as Mary, but because he didn't start as early, his account was worth only $257,382. At age 45, he would have had to save $1,320 per month to match Mary's account. Time works to your benefit. That's why it's so important to reach young women and show them how they can let their money do the work. At the other end of the spectrum, age is a critical ingredient in determining the kind of risk you're willing to take. At retirement, you don't have the opportunity to continue saving and investing your $200 a month. Therefore, you can't afford losses as readily because you can't take advantage of the future low prices to buy bargains. That means you have to be more conservative about your investments. The critical ingredient of age is that it's to your advantage if you start young, and it's also an important consideration in determining risk if you're old.
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