Here’s an age-based look at when you should buy stocks

  • Instead of buying stocks based on market ups or downs, determine your time horizon for drawing down on funds to cover retirement expenses.
  • Savers in their 20s and 30s could keep up to 80 percent of investments in stocks, unless planning to retire early in their 50s.
  • Forty- and 50-somethings can invest up to 70 percent of funds in stocks, but most important is stashing away as much cash as possible.
  • Those in their 60s and 70s may still be working but need to hone a game plan for when they start to withdraw savings.

Whether the stock market is rising, falling or floundering, as it has been for the past few months, the question investors always ask is: “How much should I own in stocks?”

Nobody has a crystal ball to determine how stocks will perform tomorrow — or during the next 10 years. So instead of trying to buy stocks based on market ups or downs, I recommend determining the time horizon for when you’ll need to draw down on these funds to cover your retirement expenses. Once you know this period of time, it’s much easier to determine how much stock you should own.

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U.S. stocks have been on a historic climb that has provided investors with abundant gains. If we go another three months without seeing a bear market, it will be the longest bull market in history, surpassing the period of October 1990 to March 2000.

But the past few months have been bumpy. Through June of this year, the S&P 500 Index is up about 3 percent, including dividends. International stocks, measured by the MSCI EAFE — an index that measures stock market performance for developed countries outside of the United States and Canada — are down just more than 1 percent.

So how do you take these statistics and decide whether it’s time to buy or trim your stock holdings? Here are some guidelines for people based on age and the need to have funds available for retirement.

For those in their 20s and 30s

People in this age group likely will have decades before needing to withdraw money from an investment portfolio, such as a 401(k) plan. Because this money won’t be needed for such a long time, I typically recommend at least 80 percent of an investment portfolio in stocks.

By way of example, a 30-year-old who invests $1,000 per month and earns an average 7 percent return on her stock portfolio will have accumulated about $1.2 million by the age of 60. At a 5 percent average return, her portfolio would be $830,000, so this extra return compounded over many years does add up.

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For millennials looking to retire early, there is an argument for owning part of their portfolio in more conservative investments. I’ve worked with successful young executives who plan to exit the workforce by age 50, if not earlier. To achieve this goal, they will need a mix of bonds, real estate, cash or alternative investments to protect their principal in bear markets while they are building their wealth. Young executives in this situation can trim the percentage of stock in their portfolio by 10 percent to 20 percent to make room for these other assets.

Parents in this age group should use the same philosophy for investing in their children’s college savings accounts. People who begin investing shortly after the birth of a child can invest this money more heavily in stocks. But as the child gets closer to enrolling in college, you want to invest more conservatively to cushion any drop in the market and ensure the cash is available when the first tuition bill arrives.

For those in their 40s and 50s

This is usually the age when people start to think about retirement — and what they need to save to get there. A person in their 40s who has not done a good job of saving but wants to retire in the next 10 years may need a more aggressive plan to achieve their goals. It’s likely they still need to invest 70 percent or more of their portfolio in stocks, but the most important action they can take to hit their retirement goal is to save more money.

For example, a person saving $1,000 per month for the last 10 years of their retirement, earning 7 percent annually, will accumulate another $173,000 in their nest egg. However, if they double their monthly savings to $2,000 and only earn 5 percent for the last 10 years of their retirement, will have an extra $310,000 by the time they retire.

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A person planning to retire in their 50s needs to consider that they may be retired for a longer period than they worked. That can be scary when considering they saved money for three decades but could need a retirement savings plan to cover four decades.

Achieving financial security in your 50s doesn’t mean it’s a good idea to massively trim investments in stock. If a person in this situation doesn’t have at least 50 percent to 70 percent invested in stocks, their purchasing power could erode in retirement and they may outlast their portfolio.

For people in their 60s and 70s

Many people will continue to work well into their 70s because they love what they do or want to stay engaged with other professionals. But they still need a game plan when the paycheck ends, especially to cover any large expenses, such as long-term health care.

Baby boomers will eventually need a plan to live off of their investments, so I recommend a balanced portfolio of stocks, bonds, cash and other investments. For those who are retired, in good health and withdrawing from their investment accounts to cover living expenses, I typically recommend stocks make up 40 percent to 60 percent of their portfolio. Ideally, a retiree has five to 10 years’ worth of their living expenses in more conservative investments, such as cash, bonds and some alternatives.

In some cases, there is strong argument to be completely invested in stocks. For example, if you have a Roth individual retirement account and it’s likely the last asset you’ll ever need to touch in retirement, you may want to continue to hold a large amount stocks in this account.

"As you consider future investments, let your time horizon for retirement and plans to tap your investment portfolio help guide your investments decisions."

A fortunate few in this group may realize they have more money than they will ever need and will leave a chunk to their heirs. Even if a person is 90 years old or older, it’s not unreasonable to add more stocks to certain investment accounts as the goals for the account evolve.

Finally, while time horizon is important in deciding how much stock to own, if you can’t stomach the periodic negative returns that come along with owning stocks, you need to own less stock. Looking back to 1929, stocks have declined an average 45 percent during each bear market. If that gives you an upset stomach and there’s a chance you’ll bail out on your stocks when they’ve gone down sharply in price, even if temporarily, your risk tolerance also needs to be a primary factor in your asset allocation.

As you consider future investments, let your time horizon for retirement and plans to tap your investment portfolio help guide your investments decisions. And remember, it’s always wise to have enough cash on the sidelines to serve as an emergency fund to pay for any unforeseen expenses and to know your propensity to handle risk. This strategy works well in up, down or sideways markets.

— By Lisa Brown, partner and wealth advisor at Brightworth