The Best Place to Invest Your Money at Every Stage of Your Life
David Bach, the best-selling author of The Automatic Millionaire shares a simple resource to help you determine where to invest your money and how much to put in each place.
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The Automatic Millionaire Investment Pyramid is based on two simple principles: (1) that your money should be invested in a combination of cash, bonds, and stocks; and (2) that the nature of this combination should change over time as your life situation changes.
As you can see, the pyramid divides your financial life into four distinct periods: the "getting started" years, the "making money" years, the "preretirement" years, and the "retirement" years. At each point, your needs and goals are different, and as a result you should probably have a different combination of investments.
Within each period, the pyramid suggests what percentage of your nest egg should be allocated to each of five standard types of investments. In order of risk, from safest to most risky, these are cash, bonds, income investments, growth investments, growth & income investments and aggressive growth investments.
The base of the pyramid rests on the safest investments (cash and bonds). As you work your way up the pyramid, you take on more risk, moving from growth & income to growth to aggressive growth. Aside from the fact that you always want your retirement account to be built from the ground up with safe investments first, the mixture of risk categories that’s right for you depends on your age. The younger you are, the more risk you can afford, since you have more time to ride out a bad stock market or other economic downturn. The opposite is true for someone who's already retired. The principle is amazingly simple, and what's more, it actually works.
Use the investment pyramid as a guide to select what kind of investments to make with the money in your retirement accounts. Rather than looking for individual stocks and bonds that match the particular risk profile that is right for your situation, I suggest you put your money in appropriate mutual funds or exchange-traded mutual funds (ETFs). Mutual funds and ETFs not only offer professional money management, diversification and ease of use, but most now allow you to start investing with as little as $50. Some even accept monthly investments as low as $25.
Reprinted (or Adapted) from THE AUTOMATIC MILLIONAIRE: EXPANDED AND UPDATED Copyright © 2016 by David Bach. Published by Crown Business, an imprint of Penguin Random House LLC. David Bach is a 9-time New York Times bestselling author and founder of AE Wealth Management. Please visit his website at www.DavidBach.com.