When it comes to investing in the stock market, it's important to know when the right time is to get out. Generally, it's recommended that you exit the stock market around age 70, or sooner if you need to. This is because by that age, your goal is to preserve what you have rather than trying to earn more. To decide where to store your money, consider when you'll need it.
Money that you'll need within two years should be kept in cash or cash equivalents. For money that you'll need in three to five years, consider investing in bonds. Money that won't be needed for five to seven years or more can be put into stocks. Your age plays a role in determining how much risk you're willing to take on with your investments.
Generally, the younger you are, the more risk you can tolerate. As you get older, it's important to reduce the amount of risk in your portfolio. The common rule of asset allocation by age is that you should have a percentage of shares equal to 100 minus your age. So if you're 40 years old, 60% of your portfolio should be in stocks.
The stock market can be unpredictable and it's normal to worry about a potential decline when prices fall. While some investors may be able to make predictions about the direction of the market, no one can say with certainty what will happen. Bonds from recent decades have generally risen in value when stocks fell, but not this year, which has caused losses for portfolios of stocks and bonds of all types. It's best to have a plan and make decisions based on your own circumstances rather than reacting to what the market is doing right now. The way your portfolio is divided between stocks, bonds and cash also plays a role in determining how much risk you're taking on.
At a time when adults are living longer and receiving fewer rewards for “safe” investments, it might be time to adjust the 100 minus age guideline and take more risks with retirement funds. This is one of the reasons why target date fund managers gradually move from stocks to bonds and cash as investors approach retirement. If you're investing in a goal that must be achieved before a certain date, it's important to consider the risks associated with relying on the stock market. Retired investors still need some growth assets, such as stocks, mostly because people are living longer. The old rule about the best portfolio balance by age is that you should keep the percentage of shares in your portfolio equal to 100 minus your age. If you want to control part of the profitability of your portfolio and take a risk with a company that could become a major driver of tomorrow's market, where you keep those stocks in your portfolio becomes an important consideration.
Basing stock allocation on age can be a useful tool for planning for retirement, as it encourages investors to slowly reduce risk over time. You can also consistently save money and avoid any attempt to choose individual stocks or time the market by investing a fixed amount of money over time. This helps smooth out ups and downs and allows you to reach your stock positions at an average cost in dollars.