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. 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 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, Navigator. Good Financial Cents breaks it down pretty well: “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 about the quick preservation of cash (think, creating savings goals for that glorious beach vacay you’re planning), long-term investing is 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 long-term investing journey.
Goals
Long-term investing is all about goal-setting. Did you miss my last post on diversification? This article breaks down the reason for spreading your money across different sectors and why you should think about the investments you make now as money you set aside to access one day in the future.
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 plans for a healthy retirement or FIRE will dictate how 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 and the understanding that you will have more time to offset losses. Your goals will look different (as will your strategy) if you’re closer to retirement.
If you’re not sure how to map out those goals, ask yourself these questions to get you started:
Money Considerations
- 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.
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 invest actively, 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.
Debt Considerations
- Do you have debt?
- The type and amount will determine the portion you decide to invest from your annual income.
Once you answer these fundamental questions, you’ll begin to understand what types of investment platforms, sectors, and funds are suitable for you and those #bosswealth goals.
Evaluating risk isn’t about (just) your killer instinct
Meet risk-weighted return
Risk-weighted return is 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 a better risk-weighted return.
It’s important to consider your risk and potential return across every investment, regardless of its form. What’s the risk of lending money to a peer or friend? It depends on how much debt they might potentially have. Assuming the friend has a proven track record of timely repayment (i.e., don’t trust they’ll repay you because they’re 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 required for an investment to grow from its beginning to its ending balance, assuming the profits were reinvested at the end of each year of the investment’s lifespan. CAGR 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.
Check out the CAGR equation here.
When all else fails, remember to diversify
Once again, diversification is a critical element in any form of long-term investing. Diversification is the practice of spreading your investment dollars across various asset classes and sectors within those asset classes. Again, I’ll refer you back to this for more on the topic!
Your Guide to Portfolio Diversification!
So what are my options?
I’m glad you asked. First, I’ll cover the top investment classes. Then I’ll go over some trending portfolio strategies to consider.
These are your top investment classes for long-term investing.
Stocks
- “Paper” investments, meaning you don’t have to manage a property or a business.
- They represent ownership in profit-generating organizations. When you invest in stocks, you’re investing in the global economy.
- Stocks can rise significantly over the long term.
- Many pay you with dividends to provide you with a healthy income stream.
- Most are VERY liquid, enabling you to buy and sell them quickly.
- It’s easy to spread your investment portfolio across dozens of companies and industries.
- You can invest across borders.
- The average annual return based on the S&P 500 is 10% yearly.
Long-term bonds
- These include corporate, government, municipal, and international bonds.
- They pay higher yields than short-term interest-bearing securities.
- If interest rates rise, the market value of the underlying bond declines.
Mutual funds
- Mutual Funds are considered ‘actively managed funds,’ which means that you (or your fund manager) select specific stocks that you believe will have the best future returns.
- You will also choose the best industry sectors to engage with under this investment class.
- Only 22 percent of mutual funds outperform for as long as five years.
ETFs
- Similar to mutual funds, these too represent a portfolio of stocks, bonds, and other investments. But, ETFs are considered 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 match the underlying index’s performance closely; they don’t aim to exceed it.
- They generally cost less than mutual funds. Your primary expense becomes the ETF’s broker commission, usually 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.
Real estate
- 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 that 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.
- Like stocks, real estate investment trusts (REITs) allow you to invest in property. 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% of their income must be returned to the investor as 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 as you can invest with as little as $500. The site boasts average returns between 12-14 percent per year.
Tax-sheltered retirement plan
- We’ll repeat it: ALWAYS max out your retirement plan.
- This is a way for you to invest a percentage of your income without being taxed. Your investments can earn income and capital appreciation year over year without immediate tax consequences.
- Funds are taxed only when they are withdrawn from the plan.
- There are many different accounts; talk to your accountant about what may be 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.
Okay, 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 techniques.
Some favorites in the portfolio game?
All-Weather Portfolio
There’s a universally recognized approach to maintaining a portfolio that can withstand market conditions. This bullet-proof portfolio is the All-Weather Portfolio, handcrafted by the mind behind Bridgewater Associates (Hedge Fund), Ray Dalio.
Dalio drafted the idea with two key considerations: 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:
Lastly, it’s important to remember that to be ‘weatherproof,’ the portfolio couldn’t be date sensitive. Asset allocation remains the same even in times of great prosperity.
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 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 itself.
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% less volatility. Its worst year saw a loss of 11%; the most prolonged drawdown period was just two years.
Ok, so where do I go from here?
Firstly, congrats for getting through this. You rock.
Second, I hope this has clarified the different paths you might take when considering how to begin a journey towards long-term investing. Remember this simple order of operations to get started:
- Maximize your retirement.
- Consider your real assets.
- Dive into the market.
Finally, 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 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.
Want to dive right in? Here’s a guide on how to choose the best investment platform for you.
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Hey Navigator, just so you know, we have financial advisors reviewing our content, but our articles are only meant to be educational. Consider this friendly information, not financial advice (talk to a professional for that!).
