Investing

How much money you should be investing at every age

How much you should invest in the stock market depends on your age and risk tolerance, among other things. Experts offer advice about how to navigate decisions.

Twenty/20

Legendary investor Warren Buffett bought his first stock at the age of 11, but most people don't begin investing until they're much older. In fact, just 39% of adults who are saving for retirement started in their 20s, according to a recent report from Morning Consult

As a result of this year's market turbulence, some beginner investors finally made the plunge, though other would-be investors are still lingering on the side.

For some people, the best place to begin is with a good investing book. Others find that numbers can provide the final, necessary push. Consider this: If someone had invested as little as $1 per day for you when you were born, that would've grown to $13,000 by the time you turned 18, assuming a 7% annual return. Even if you never added another dollar, that amount could swell to about $410,000 by the time you're ready to retire.

"Invest early and often, those are the best investing rules," recommends Sam Stovall, U.S. equity strategist at CFRA Research. Doing so might just help you to avoid the top regrets among investors, which were not saving for retirement sooner, not investing in stocks sooner, or not purchasing a certain stock earlier, according to a 2019 survey by MagnifyMoney.

That said, not all of your money should be invested in stocks, or stock-based index funds and exchange-traded funds (ETFs). To provide some balance to your portfolio through the ups and downs of the stock market, you'll want to also invest in bonds.

Here are some guidelines for what that mix should look like, depending on how old you are.

How much of your portfolio should be invested in stocks, by age

Before making any investments in the stock market, make sure you're doing so with money that you won't need to tap within the next five years. That's because, as this year has demonstrated, the market can be unpredictable during short periods. However, it has always recovered, and with time on your side, you can ride out those bouts of turbulence.

You may have heard of an investing rule that's been passed around for years that includes a simple formula for figuring out your asset allocation, or how much of your portfolio is invested in stocks (also known as equities) versus bonds (or fixed income). This rule suggests taking your age and subtracting it from 110 to decide how much to invest in stocks. If you're 30, for example, that rule would mean 80% of your portfolio is invested in stocks, and the remaining 20% is invested in fixed income.

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Stovall calls it "the investing-for-dummies type of approach" because it simplifies what can seem very complex to new investors. What's more, following this adage means you'll always be invested in both types of assets. "It forces you to move out of equities little by little as time progresses," he notes.

But Ric Edelman, founder of Edelman Financial Engines, is not a fan. "I always considered that to be a very stupid approach to asset allocation," he says. "It uses a single data point — age — and completely ignores every other aspect of your life. I would strongly encourage people to ignore that approach."

Instead, Edelman says, think about your asset allocation like an airplane's glide path. When you're young, that's like being at full cruising level, and "a bulk of your money can be invested in stocks," he says. As you approach retirement age, think of the plane approaching the runway, and gradually shift your money so that eventually a majority is invested in bonds. "By the time you reach retirement, you want less money in stocks, which gives you less risk, and more certainty that the money will be available to you when you need it."

By the time you reach retirement, you want less money in stocks, which gives you less risk, and more certainty that the money will be available to you when you need it.
Ric Edelman
Founder of Edelman Financial Engines

Edelman's advice is more similar to the guidelines that the money managers at T. Rowe Price suggest for your portfolio mix, based on your age:

  • In your 20s and 30s: Up to 90% in stocks (because of your long investment timeline), with up to 10% remaining in bonds.
  • In your 40s: Up to 80% in stocks, with up to 20% remaining in bonds.
  • In your 50s: 60% to 80% in stocks, 20% to 30% in bonds, and up to 10% in cash.
  • In your 60s: 50% to 65% in stocks, 25% to 35% in bonds, and 5% to 15% in cash.

Finally, your 401(k) provider may offer target-date retirement funds, which do much of the asset allocation legwork for you because they're made up of a mix of investments that changes over time, depending on when you plan to retire. Target-date retirement funds can serve as a guidepost for determining your own asset allocation in other accounts, Stovall says.

Why your risk tolerance matters as much as your age

If you were invested in the stock market earlier this year, you've already experienced a bear market, or when a major index falls by at least 20% from a recent high. You can expect a handful of these types of market declines over the course of your investing lifetime.

Not all investors react to market turbulence in the same way, which is why your tolerance for risk may be as important as, or even more important than, your age when determining how much money to allocate to stocks versus bonds.

It's possible your risk tolerance changed as a result of the recent market volatility, Edelman says. That's why he recommends thinking back to how you felt when the S&P 500 fell nearly 34% in about five weeks between February and March of this year. "If that induced fear and panic, you need to consider reducing your equity allocation," he says. "If you were to panic during a downturn and sell when prices are low, you would do a disservice to yourself."

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In theory, you should feel more comfortable taking on risk as an investor when you're young because stocks have time to rebound following declines. But risk tolerance may have more to do with your personality.

"The smartest thing to do from a psychological standpoint is to recognize your weakness so you can overcome them," Stovall says. "If you are a nervous Nellie, then you need to use a rules-based investment approach" that ensures you don't make an emotional decision you'll later regret, like selling when stock prices are low, he adds. 

How much money to invest in stocks

As with your other investing decisions, there's no one-size-fits-all answer when it comes to how much money you should be investing. There are contribution limits associated with retirement accounts, because they offer tax advantages, while there are no limits if you're investing money in the market after taxes.

Many people have their eye on $1 million as a goal for retirement savings. Even if that's not your magic number, you may be pleasantly surprised to learn that getting there isn't so hard, especially if you start saving and investing in your 20s.

The sooner you begin investing for the future, the easier it is to build wealth — and you have the power of compound interest to thank because you earn interest on your savings as well as interest on the interest you've earned. Grow's compound interest calculator will help you see how different amounts of money will compound and can grow over time.

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At a minimum, focus on contributing enough to your 401(k) to get whatever amount your employer is willing to match because it amounts to free money, Stovall says. "If you start learning how to pay yourself first, that's probably one of the most important rules of investing."

More broadly, when deciding how much you can invest, make sure you don't sacrifice immediate needs for longer-term goals. That's especially important if your financial situation has changed as a result of the coronavirus pandemic and economic recession, Edelman says.

While experts generally recommend an emergency fund that can cover up to six months of expenses, right now Edelman is advising his clients have as much as two years worth of money readily available in the event they lose their job or incur a major financial issue. That way they won't have to sell investments, he says.

Otherwise, stick to your current plan, and try to increase the amount you're investing over time. "If you are planning on not using the money for 10 years or more, the current crisis will be a distant memory when you need the money," Edelman says. "Investors need to avoid the desire to get rich quick — avoid what's going to happen in the next week, month, or quarter — and make decisions based on the next decade or longer."

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