Time to get on track.
Life gets serious in your 30s, a decade when the decisions that are made -- family, career, as well as saving and investing for retirement -- can have a major impact for years to come. With that in mind, here are eight tips to help get the investor on the right track.
Do not wait.
The best advice for anyone in their 30s is don't delay, says Ted Braun, certified financial planner at Hoover Financial Advisors in Malvern, Pennsylvania. "While it's never too late to get started, the sooner the better. Your biggest asset is time and the value provided by the effects of growth and compounding. Most companies offer some type of employer-sponsored retirement plan. This is always the fastest and most convenient way to get started, with a percentage of your salary coming directly out of your paycheck and being invested toward your own retirement," Braun says.
Max your 401(k).
When you're starting your career, you're often struggling to make ends meet. "By the time you're in your 30s, you should have gotten a few promotions, and you might have a working spouse with whom you share household expenses. At this stage, maxing out your 401(k) plan -- to the full $18,000 in salary deferral -- should be a priority. In addition to building a long-term retirement nest egg, you'll take a major bite out of your federal income tax bill," says Charles Sizemore, founder of Dallas-based Sizemore Capital Management.
In your 30s, you should be starting to build the portfolio that you'll continue contributing to well into your 40s and 50s, Sizemore says. "Consider tax efficiency now, while you're likely in a relatively low tax bracket. As a practical matter, this means stuffing things that are taxed unfavorably, such as bonds or precious metals, into tax-free IRA or 401(k) accounts. Lower-taxed investments, such as index mutual funds or ETFs you intend to buy and hold, can be held in taxable accounts, as most of your returns will come in the form of unrealized capital gains," Sizemore says.
Understand your tolerance for risk.
The rule of thumb is the younger you are, the more risk you can afford to take because you have more time to recover any losses following a major drop in the market, Braun says. "That said, being younger does not automatically mean you have a high tolerance for risk. Your stock-bond allocation should be driven by three key factors: risk tolerance, time horizon and goals. Assess your risk tolerance by partnering with an advisor or using a risk tolerance questionnaire. This helps to protect you from making a rash decision during a market downturn," Braun says.
Create a diversified portfolio.
In your 20s, it makes more sense to invest your limited funds into a stock index fund, Sizemore says. "But by the time you're in your 30s, you hopefully have some real savings to speak of, and diversification starts to make a lot more sense. This is a good time to add exposure to small- or mid-cap stocks, foreign stocks or real estate investment trusts. And it's also a good time to start doing regular annual portfolio rebalancing. If you were responsible in your 20s and managed to save up a nest egg, it makes sense to protect it in your 30s," Sizemore says.
Look beyond the U.S.
Consider international investments for retirement accounts. "People like to go with what they know, which is domestic stocks and companies," Braun says. "What they often don't realize is that roughly half the value of all stocks in the world are from companies based outside the United States. When you avoid international markets, you are not truly diversified. International assets should represent approximately 30 percent of your stock portfolio, with roughly one quarter of that being emerging market assets. Emerging markets have economies that are generally less stable than developed and thus have greater volatility."
Avoid the hot stock of the moment.
"Stay away from the flashy trends that can sometimes seem very enticing," Braun says. "Just as there are no shortcuts to success in everyday life, there are no shortcuts to achieving investment success. If it seems too good to be true, it probably is. For those who prefer the do-it-yourself approach, do your homework and work to create a broadly diversified portfolio with a mix of low-cost index funds or ETFs."
Invest your time.
Set aside time to focus on your finances. Schedule time each year to do financial planning with a professional advisor. "Managing our own money is emotional and leads to decisions one would not make if they were a fiduciary for someone else's account," Jimmy Lee, CEO of the Wealth Consulting Group in Las Vegas.
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