The “best” investment strategy

Many people ask “What is the best investment strategy for someone in my position?” This question is universal whether it is a single woman over 50 or a couple in their early twenties with children. The short answer is there is no single best investment strategy for any broad range of people. An individual or family’s situation and needs are what goes into determining what kind of investment strategy to pursue.

Let’s take a closer look at the example of the couple in their 20’s with children. On the face of it some advisers might suggest that this couple could be very aggressive with their investment portfolio, as they have a very long investment horizon and many years to ride out any unforeseen market declines. However, if one of the couple’s goals is to buy a home with a backyard so their children can play safely outside, this changes the long-term horizon dramatically. Assuming their child was just born they would have between 2 and at most 3 years until this need (and money) will be realized. This is a very short time horizon in the world of investing. Given this situation, one possible investment strategy would be to invest all of their savings into short-term US government securities. These financial instruments are backed by the full faith and credit of the United States government. Also with their short time frame to maturity the couple’s money should experience less volatility then a portfolio comprised of both stocks and bonds. This solution gives the couple a way to make their money work for them until they buy their first house, while at the same time being able to sleep easy at night.

Next, let’s look at the single woman who is in her 50’s. Let's assume that this person has an executive level position and good health. In addition to having a well paying job she also has a sizable amount of equity in her home, sufficient emergency cash reserves, does not expect to retire from working until the age of 67 and considers herself an aggressive investor who is comfortable with the volatility that the market sometimes produces. Here, the exact opposite is true from our young couple. This woman could allocate her portfolio 100 percent into a diversified set of companies, both US and foreign. The reason being is that she has a much longer time horizon then the young couple for this money. Additionally, if any unexpected expenses arose she could pay for those out of her substantial emergency cash fund and not have to worry about selling any of her portfolio companies at an inopportune time.

So, when you go to consider an allocation for your portfolio or when you go and talk to an adviser be aware there is no magic formula for how much should be placed in bonds, stocks, mutual funds, or other investments. It all depends on YOUR financial situation and goals; both long and short term.