There is no universal formula for investing. The appropriate strategy depends on many factors, one of the most decisive being age. Over the course of life, priorities, risk tolerance and the ability to accept losses change. The important thing is to understand how to adapt financial decisions to each stage of life to build solid and lasting wealth, as experts explain Investing without mythsING’s project to talk openly about investments.
Young people and power of time
The early stages of life are usually the most favorable for taking risks, according to Ignacio Menéndez, head of market analysis at ING. When you are young, without great family burdens and presumably with many years ahead of you, you have the advantage of time. “This allows for greater risk tolerance, with a aim to achieve greater profitability in the long term, although there may be some concerns along the way.”
But time is not a sufficient guarantee, “we also need to diversify (in financial products)”, underlines Menéndez. The most recommended products at this stage are usually mutual funds and ETFs (Exchange Traded Funds), a type of investment funds that are usually used to replicate the behavior of international markets, but with the difference that they are bought and sold on the stock exchange as if they were shares, offering flexibility and diversification in a simple way, as the expert clarifies.
Menéndez provides an indicative formula to know what risk one can take depending on the different phases of life. “Sometimes the rule of 120 is used to estimate the percentage to be allocated to variable income and fixed income based on the age of the investor. It consists of subtracting one’s age from 120 and investing the amount obtained in variable income,” he explains. “For example, with this rule an 80-year-old would invest 40% in stocks.”
Intermediate phases: prudence e clear objectives
As the years pass, the investment profile tends to moderate. In this phase usually come family responsibilities, medium-term projects – such as buying a house or raising children – and the need for greater financial stability. “But personal goals are as important as age,” says Menéndez. “A young couple saving for a down payment on their house cannot afford big shocks, while an older person investing to leave a legacy to their children doesn’t need stability and can invest in riskier products,” he adds.
The level of financial knowledge also becomes relevant. The more experience an investor has, the better prepared he or she will be to understand market cycles and avoid impulsive decisions. On the contrary, those who let themselves be carried away by emotions or trends run the risk of selling at the worst time.
At this stage it is advisable to combine shares and fixed income securities, favoring mixed funds or ETFs that reduce volatility without completely giving up growth.
Retirement: stability e planning
After retirement, wealth management changes focus. The theory says that the percentage of the stock market should be reduced and that of fixed income increased, to give more stability to the assets, “even if the strategy depends a lot on the person”, underlines Menéndez, and gives the American model as an example: “There is a lot of talk about the 4% rule for retirement: with a portfolio invested 50% in bonds and 50% in shares, and sufficiently diversified, you can withdraw between 3% and 4% of the assets to spend every year and that money will never run out in 30 years.”
Every investor should analyze their situation, taking into account aspects such as the amount of public pension they receive, whether it is sufficient for daily expenses or whether they need to use part of their assets to pay for a holiday or a home renovation. “So he will choose one path or the other, always aware that he doesn’t have much time ahead of him to recover his assets if a crisis hits and his investments sink,” recalls Menéndez.
