First rule of investing: know thyself
We’ve talked a lot about the importance of investing from a young age. After all, the amount of money you can make at work is limited. But there’s also more than one way to invest, and how you choose to do so depends on your money personality.
Are you cautious with your money, or willing to take a big risk? What’s your end goal? And how long do you have to build wealth?
Traditional advice suggests the younger you are, the more of your portfolio you should invest in stocks, and a smaller amount in bonds. Stocks are riskier than bonds, but if you’re young, the thinking goes, you have more time to recover losses if stocks take a downturn—and more time to reap the rewards of higher market returns. But depending on your tolerance for risk, the traditional advice might not be right for you.
So how do you know what is right? The first step to finding your money personality is outlining your goals. If you’re a millennial, you probably have very different financial goals than your parents or grandparents. Do you want more money to pay down your student debt? Are you saving up to buy a house a few years down the road? Or are you investing for a comfortable retirement? Write down why you want to make more money (and simply “building wealth” is a perfectly acceptable reason) and how long you have to achieve your goal. Investing for retirement when you’re 25 looks very different than making some extra money for a down payment in 10 years.
For help nailing down your money priorities, this quiz from WorthFM, a soon-to-launch investing product for women, offers great insight into your MoneyType. (That is the name of the quiz after all.) Sample statements, which you rank from “Totally like me” to “Totally not like me,” include “I am very good at creating an action plan/budget around my money and sticking to it,” and “At my most relaxed, I have an easy-come, easy-go attitude about money.” Then you’re told what percentage of each of the five money types you are: Producer, Nurturer, Visionary, Epicure, and/or Independent. FWIW, I’m 75% Producer and 66% Visionary, which means I’m “grounded, diligent, and consistent” when it comes to managing my money (some might say conservative or boring), while viewing it as a “tool for self-expression.” The Producer side of me fears a major loss or losing control to someone else (true), and risks being too conservative with my money, while my Visionary side just wants to be recognized for my passions and projects.
(Other personal finance writers I follow like this quiz from Payoff, though I didn’t agree with the result it gave me. And this quiz from LearnVest outlines your potential money vices, which is interesting.)
Now that you know your personality, you can determine your asset allocation. Vanguard has a simple questionnaire that delivers a suggested allocation depending on your age and how long you have until you retire, as does Wells Fargo—though of course you should take more than a few quizzes to decide what’s right for you. The reason it’s important to know your money personality before you determine your asset allocation? If you’re young and you aren’t a big risk-taker (like me), you’re losing out on a ton of potential wealth-building. It’s only natural to want to protect your capital, but, as MONEY illustrates here, “even risky stocks can be safer than they seem.” Knowing ahead of time that you may need to take on more risk will make seeing your asset allocation less of a shock. (Spoiler alert: If you’re young, that’ll likely be 80 to 90% stocks.)
Put together, knowing your risk tolerance, your goals–and how long you have to achieve them–can inform how you save and invest.
And if all of this is too much and you’d rather set your retirement investing on auto-pilot, target-date funds are another option that more and more millennials are choosing. Essentially, your asset allocation is set according to when you plan to retire, and it automatically adjusts as you get older. For example, if you plan to retire in 2060, your 2060 fund would have a much higher percentage of your portfolio in stocks right now, whereas if you’re a bit older and select, say, the 2030 fund, less of your portfolio would be invested in stocks. Each year, the fund’s managers assess performance and tinker with the assets when needed.
Have a question, comment, or suggestion? Email us at firstname.lastname@example.org.