Deciding how to invest in your 30s is a critical decision, so dongratulations on making it this far.
At this point in your life, you’ve likely acquired a few recurring expenses. Hopefully you have a recurring income stream to match. Meeting these daily obligations is important, but so is looking to the future. Even if you have an eye on retirement, it’s also important to invest for medium-term obligations—that’s anything between three and five years away. Whether it’s a vacation fund, children, or a new house, meeting these needs in addition to your long-term future is a difficult balancing act.
Fortunately there are several tips and tools you can use to grow your capital over several decades without sacrificing your ability to save for events only a few years ahead. Your future self will be happy you paid attention.
Don’t play it safe
Hopefully you have a long life ahead of you, which means you need to be thinking long-term. While near-term savings goals may seem more important, you still have every investor’s greatest asset: time.
After people exit their 20s, and especially as they acquire ongoing expenses like a mortgage or children, retirement planning can take a backseat. That’s a mistake. The best time to invest for retirement is decades before retirement. The power of compound interest is simply too strong.
Let’s say your goal is to retire when you’re 60 years old. What difference could a few years make? Plenty. If you start with $0 in savings when you’re 35 years old and invest $10,000 per year at an 8% interest rate, you’d have $800,000 by the time you turned 60. What if you started to invest when you turn 45 years old? Surely that’s still plenty of time to build a nest egg, right? Using the same assumptions, you’d only wind up with around $330,000.
Taking a bit more risk to pump up your returns by a few percentage points can also have a huge impact. Instead of an 8% interest rate, what if you earned 12%? If you invested $10,000 per year at age 35, you’d have $1.6 million. That’s double the ending amount if you earned just 8% annually.
The most important thing is to start investing now. The next priority is to maintain exposure to stocks with more upside, even if that means taking on some extra risk. Avoid traditionally “safe” stocks like Manulife Financial Corporation (TSX:MFC)(NYSE:MFC) in favor of long-term winners like Fairfax Financial Holdings Ltd (TSX:FFH), which has averaged 17% annual returns since 1985.
Take risks wisely
It’s also possible to allocate some of your portfolio to traditionally risky areas of the market. If you allocate capital to risky bets, be sure to mitigate that risk wisely. Here’s an example.
Guyana Goldfields Inc. (TSX:GUY) is a small gold miner worth just $180 million. On many occasions, the stock has risen by 400% or more. On the surface, this looks like a great way to grow your portfolio quickly. But, of course, there’s a catch. On many occasions, the stock has lost 90% of its value or more. How can you invest in mining stocks without the risk?
Sandstorm Gold Ltd (TSX:SSL)(NYSEMKT:SAND) is a perfect candidate. Rather than operating its own mines, it owns interests in more than 100 projects. When its portfolio projects succeed, Sandstorm succeeds. Using this portfolio approach allows it to spread its bets around the world, across dozens of companies and opportunities. This stock has proven capable of rising 100% or more but comes with significantly less downside risk.
If you’re going to take risks with your portfolio in your 30s, find ways to reduce your downside exposure by choosing the right business models.
