Although baby boomers as a group share some common investment characteristics, all investors, regardless of age, are unique. This means that no single investment strategy can be a match for every individual’s financial objectives and risk tolerance. However, there are some strategies that boomers can use to help determine the appropriate mix of stocks, bonds, mutual funds and other objectives when building their retirement portfolios.
Check Out: I’m an Investor: I’m Making These Money Moves Immediately If Trump Wins
Read Next: 7 Reasons Boomers Must Speak To a Financial Advisor Before Spending $10,000 or More
If you’re a baby boomer working on your investments, these are some of the strategies you shouldn’t overlook, along with some tips for how you can help determine your appropriate mix of investments.
Define Your Investment Objectives
You can’t select the components of your portfolio until you know what you wish to accomplish. The first step in doing this is to determine your investment objectives. These are the specific outcomes you want from your individual portfolio, not a blanket goal such as “I want to make as much money as possible.”
For example, if you’ve built up a sizable portfolio, you might want to draw income from it to fund your lifestyle. If you’re still looking to amp up your account balance, you might have pure capital growth as your objective. Many investors choose to pursue a combination of growth and income in a portfolio. But the important thing to do is to design a portfolio that meets your needs, regardless of what others may think or do.
Learn More: Here’s How Much a $1,000 Investment in Ford Stock 10 Years Ago Would Be Worth Today
Determine Your Risk Tolerance
An important part of the balancing act that comes with trying to sort out a portfolio of stocks, bonds and mutual funds is determining your risk tolerance. It’s all well and good to think, “I need a portfolio of 100% aggressive stocks so I can score the highest long-term return,” but you’ll need to understand the volatility that comes with these types of investments.
If the ups and downs of your portfolio are so dramatic that they keep you up at night, then your investments are too risky. Accurately and honestly determining what your risk tolerance truly is can help you choose the right investments.
Chart Out Your Timeline
The final leg of the investment planning triangle is charting out your timeline. If you plan to liquidate your portfolio within 12 months, for example, it makes no sense to pack it full of aggressive growth stocks. One simple market correction could leave your portfolio down 20% or more right at the time when you need the money. If you’re charting out a 30-year retirement, on the other hand, you have time to ride out the ups and downs of the market and can afford to keep some equities in your portfolio.
Understand How Different Investments Work
It’s hard to pick among different investments when you don’t understand how they work. Here’s a primer, although there’s obviously much more to know about each asset class.
Stocks
Stocks represent an ownership share in a real business. The value of a stock fluctuates from second to second on the public exchanges in response to a number of factors, from macroeconomic growth to internal profits to interest rates, inflation, geopolitical turmoil and a number of other factors.
You can earn money from stocks in two ways, through dividends or capital gains. There are many different types of stocks, from mature, less-volatile blue-chip stocks — that also tend to pay dividends — to aggressive stocks that may be outright speculations, along with everything in between.
Bonds
Bonds are income-generating investments. Companies (or governments) agree to make regular interest payments at a fixed rate for a set period of time until they mature, at which point an investor’s principal is returned to them. They are generally more conservative than stocks, but inflation can damage the value of both their principal and their interest payments over time.
Mutual Funds
Mutual funds collect money from multiple clients and invest that money professionally according to the fund’s stated investment objectives. They can lessen risk in an investor’s portfolio because they are typically diversified, owning perhaps hundreds of different securities at once. This removes the potential that you could lose your entire bankroll by investing in a single stock.
Choosing among these (and other) investment options is part art and part science. Many investors turn to a financial advisor for help with constructing a portfolio because it can be hard to create one on your own that meets your investment objectives, timeline and risk tolerance and achieves the highest return for the lowest risk. But with some research and effort, individual investors can accomplish this on their own as well.
Cover All Your Bases
Investment planning should be a holistic enterprise. Although picking among stocks, bonds and mutual funds is an important part of the overall process, your investment portfolio doesn’t exist in a vacuum.
All investors should start with an emergency fund covering at least three to six months of expenses. Boomers, especially if they are already retired, need this even more, as the lack of a regular income makes an emergency fund indispensable.
Baby boomers should also make sure they have all of the insurance they need, from health and home to auto and long-term care, and they should also have an estate plan in place. All of these elements are important to have in conjunction with a properly balanced investment portfolio.
More From GOBankingRates
- Mechanics Explain Why You Should Never Buy These 6 Popular Car Brands
- Florida's Retirees Are Fleeing: Experts Predict These 5 States Will Be Top Retirement Spots in 10 Years
- 5 Genius Things People With Healthy Savings Do
- 9 Things the Middle-Class Should Consider Downsizing To Save on Monthly Expenses
This article originally appeared on GOBankingRates.com: How Boomers Should Choose Between Stocks, Bonds and Mutual Funds When Investing
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
