So how much risk do you have to take to reach your goals? If your goals are moderate and far away and you sock away a good deal of money, it may be possible to attain them with a low level of risk. On the other hand, if your goals are ambitious, near in the future and you prefer to spend rather than save, you'd better be prepared to take more risk or change your evil ways. It all depends on your temperament, financial circumstances and age. Many advisors offer these general guidelines:
- Investors in their twenties are often just getting started, and while income may be good, outgo is usually more. Paying off education loans, saving for a house and starting a family are all expensive propositions that often take priority over saving for the future. Ironically, this is often the best time to sock away money, allowing the effects of compounding to work for you over time. If you can withstand the ups and downs of more volatile investments, consider taking some higher risks with part of your long-term savings. Don't have any money to invest? Start brown bagging your lunch, and earmark the savings for your retirement.
- Investors in their thirties are usually more financially set but are still on an upward track to their peak earnings years. Often saddled with the needs of a growing family, moderate-risk investments are usually the most popular among this age group.
- In their peak earnings years, the forties and fifties, investors often have more disposable income and fewer obligations. Many families have finished paying for their children's college educations (or passed the remaining costs on with the sheepskin) and are now faced with saving for retirement. At this point, the mantra becomes "investor know thyself." If you've never ventured into anything but shares of the local utility and can't stomach the slightest fluctuation, don't put your peace of mind at risk (to say nothing of your money) by taking big chances now with your hard-earned dollars.
Thankfully, you don't have to be Jake La Motta or Muhammad Ali to win big in the investing ring. Just a little common sense, diversification and asset allocation should keep you in the fight.