If you’ve been with Nav.it for a while, you’ll likely already know the powerful fact that women live 5-7 years longer than men. You also might know that 90 percent of us are likely to take what the biz calls a career pause for caregiving at some point or another. That “pause” coupled with the idea that you are likely to live well into your 90s (maybe more for you youngsters…) means we HAVE to think about how we invest and save for our Golden Years differently than our male companions.
For years women have been considered to be more ‘bearish’ toward their investment strategies (if they’re in the markets at all) because of the characteristically female traits like caution, thoughtfulness, and risk-aversion. Thus, the investment sector continues to quickly set us aside as the less exciting contributor to our local and global economies.
Great. Now what?
Well, we at Nav.it don’t think there’s ANYTHING wrong with these strong qualities that actually (historically) make us better long-term investors than our male counterparts.
So…let’s talk about how to become a strong, confident, influential long-term investor.
What qualifies long-term investing?
Good question, Nav.igator. Good Financial Cents breaks it down pretty well by explaining: “Long-term investing means accepting a certain amount of risk in the pursuit of higher rewards. This generally means equity-type investments, like stocks and real estate.”
While short-term investing is all about quick preservation of cash (think, creating savings goals for that glorious beach vacay you’re planning), long-term investing is all about growing your wealth over time.
Sound like a solid strategy?
Great. Let’s talk about where to start and what to remember as you head out on your journey through the world of long-term investment.
Long-term investing is all about goal-setting. Missed my last post on diversification? This article breaks down the reason for both spreading out your money across different sectors and why you should think about the investments you make now as money you set aside to one day (a day far, far away) access.
Your goals will likely depend on where you’re at in your life right now as well. For example, if you’re in your 20s, your goals for a healthy retirement or FIRE will dictate the way you spend and invest right now. You’ll likely be a bit more ‘bullish’ or risky with your investments with the promise of greater returns coupled with the understanding that you will have more time to offset losses. Your goals will look different (as will your strategy) if you’re a bit closer to your retirement years.
Not sure how to map out those goals, ask yourself these questions to get you started:
How much am I willing to invest now from my yearly income?
How much do I project to make in my current role?
Do I want to go out on my own at some point?
Do I want to retire early or even at all?
Have I maxed out my 401K? You should do this. No matter what. Non-taxed money at any age is a great thing to rely on.
2. Mental Considerations
Are you more likely to take a bit of risk with your money moves or are you pretty cautious about how you spend your money?
Do you have time to actively invest or do you want to take a more passive, backseat approach?
Where do your anxieties around money lie? Do you feel comfortable adhering to the rule that you shouldn’t ever expect to use the money you invest(there will ALWAYS be some semblance of risk)?
3. Debt Considerations
Do you have debt?
What kind and how much will determine the amount you decide to invest from your income per year?
Once you answer these fundamental questions, you’ll begin to understand what types of investment platforms, sectors and funds are right for you and those #bossbitch wealth goals.
Evaluating Risk Isn’t About (just) Your Killer Instinct: Meet Risk-Weighted Return:
Otherwise known as how much return your investment has made relative to the amount of risk that investment has taken over a given period. Investments with the lowest risk will have the better risk-weighted return.
It’s important to think about your risk and potential return across each and every investment you consider. No matter what form the investment takes. What’s the risk of lending money to a peer/friend? It depends on how much debt they might potentially be in. Assuming the friend has a proven track record of timely repayment (i.e., don’t trust they’ll repay you because she’s an OG), set an attainable interest rate to strengthen your risk/return rate.
Understand How Money Makes Money: Refresher on Compound Annual Growth Rate:
Compound annual growth rate (CAGR) is the rate of return that would be required for an investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end of each year of the investment’s lifespan. This is a critical concept in long-term investing as it proves how you can evaluate how much your money is likely to grow year over year from the initial investment.
Once again, diversification comes into play as a key element to any form of long-term investing. Diversification is the practice of spreading your investment dollars out across various asset classes and sectors within those asset classes. Again, I’ll refer you back to this for more on the topic!
Similar to mutual funds, they too represent a portfolio of stocks, bonds, and other investments but ETFs are considered to be passively managed.
ETFs invest in an underlying index (like the S&P 500), giving the fund full access to the US large-cap (large company) market.
ETFs seek to closely match the performance of the underlying index, they don’t aim to exceed it.
They generally cost less than mutual funds. Your primary expense becomes the ETF’s broker commission- usually running between $5-$10 at discount firms.
Low trading costs and great market exposure make ETFs a strong choice if you’re looking to balance your portfolio.
Owning a home is investing in real estate!
Rental real estate is a HOT topic these days. If you’re interested in this route, keep in mind the purchase price and carrying costs have to be low enough to be covered by your tenant’s monthly rent payment. Oh, and don’t forget about the management of the property!
Be realistic about your goals here. You will likely break even far sooner than you will turn a profit.
Most rental real estate is purchased for capital appreciation.
Real Estate Investment Trusts (REITs) allow you to invest in property in a similar way to stocks. Buy into the trust, and participate in the ownership and profits of the underlying real estate. It can quickly become a high yielding investment as 90 percent of their income must be returned to the investor in the form of dividends.
Real Estate Crowdfunding is similar to peer-to-peer lending. It’s most familiar in the commercial real estate world. You can choose any method for investing in the property. Fundrise is a hot topic in real estate right nowas you can invest with as little as $500. The site boasts average returns between 12-14 percent / year.
Tax Sheltered Retirement Plan
We’ll say it again: ALWAYS max out your retirement plan.
This is a way for you to invest a percentage of income without being taxed. It means your investments can earn income and capital appreciation YoY, without immediate tax consequences.
Funds are taxed only when they are withdrawn from the plan.
There are a ton of different accounts, talk to your accountant about one best for you.
Roth IRAs offer tax-free income in retirement. I LOVE Roth IRAs. Check them out!
Put this all together for me, please….
Ok, so if you’re like many of us, you might want to set up a more automated approach to your long-term investing strategy. Check out Portfolio Charts for a very deep dive into the top-performing portfolio classes and strategies.
Some favorites in the portfolio game?
So there’s a universally recognized approach to maintaining a portfolio that can withstand any market condition. This bullet-proof portfolio is called the All-Weather Portfolio, handcrafted by the mind behind Bridgewater Associates (Hedge Fund), Ray Dalio.
Dalio drafted the idea with two key considerations in mind: growth and inflation. He recognized that growth and inflation are either up or down. So, he defined this concept into four quadrants and designed a portfolio that could perform well across each.
The graph looks like this:
Courtesy of uglybudget.com
Lastly, it’s important to remember that in order to be ‘weatherproof,’ the portfolio couldn’t be date sensitive. Meaning, even in times of great prosperity, the asset allocation remains the same.
Basically, if you’re ready to consider an All-Weather Portfolio, this is what it will look like:
Stocks: 30% Domestic Total Stock Market
Bonds: 40% Long Term // 15% Intermediate-Term
Real Assets: 7.5% Commodities // 7.5% Gold
The Golden Butterfly | A More Optimistic View of the All-Weather
By now I should be giving you a medal for getting through what quickly became a LOT of text. Don’t worry, this is the last topic I’ll cover…
The Golden Butterfly Portfolio is being called an ‘improvement’ on the All-Weather approach. Remember my reference to Portfolio Charts? Well, the creator of that site (a mechanical engineer) created this more optimistic approach and Wall Street is beside themselves.
Why am I calling it the optimistic approach? Well, the Golden Butterfly weights toward times of prosperity (as we’re more often in periods of prosperity) by doubling down on equity assets. It also recognizes the value premium by including US small-cap value (smaller companies that do well on the market).
Here’s what the Golden Butterfly looks like:
Stocks: 20% Domestic Total Stock Market // 20% Domestic Small Cap
Bonds: // 20% Long Term // 20% Short Term
Real Assets: 20% Gold
When tested against historical highs and lows, the Golden Butterfly had almost the same long-term real compound annual growth rate, but with 60 percent less volatility. Its worst year saw a loss of 11 percent and the longest drawdown period was just two years.
Ok, so where do I go from here?
First, congrats for getting through this. You rock.
Second, I hope this has given you some clarity around the different paths you might take when considering how to begin a journey towards long-term investing. Remember this simple suggestion to get started: first, max your retirement, then consider your real assets, then dive into the market.
Finally, with this knowledge, you now need to think about how to optimize your time as well as your investments. If you want to take a more passive approach, consider a robo investor. If automation isn’t really your style, we highly recommend sitting down with a financial advisor. I promise they are worth your time and are far more accessible than you think.