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CTSSHAH
@ctsshah
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Investing Life Stages

Priorities Change. Risk Tolerance Should Too.

❄️ Everyone is unique with their own set of needs, expectations, risk tolerance, and obligations. To think that there is a one size fits all for leveraging the stock market or other assets would be unwise. I've been on Public for going on 6 months now and spent a considerable amount of time trying to start conversations focused on sharing knowledge and building out financial literacy. I'm by no means an expert, but before 2022 starts I wanted to encourage people to reflect on what investing life stage they are in and how they are choosing to take on risk or mitigate risk to achieve their financial freedom.

⚠️ Lets preface this by saying that my opinion of how you choose to spend or invest your money should mean nothing to you. It is your life and money, and ultimately you are responsible for those decisions and living with the consequences. Today's post is more about unpacking concepts and choosing how you then apply these and is geared towards #NewInvestors.

💰 📈 Wealth Creation - 100 Minus Age Rule:

If your goal is geared towards wealth creation then one of the first questions you should be asking yourself is what propotion of your money should go to cash, stocks, bonds, or other asset classes (ex: gold, real estate, collectibles, or crypto). A commonly referenced rule is that an individual can get a rough estimate by subtracting their age from 100 and that this the amount that should be towards stocks (ref 1). I am 34 years old now and so 100 - 34 would mean that I should have 66% in stocks ... I do not follow this rule and in full transparency I think this year I finished at about 90% stocks/ETFs, 5% bonds, and 5% crypto. While this rule is a general guideline, it is an oversimplification - not all 34 year olds are the same. This does not account for: student loan debt, risk toelrance, being late to investing, amount able to save, general health, planned retirement age, or the unexpected. I'm not advocating for going heavy or light on stocks, but simply encouraging you to take some time to consider what your goals are, what risks you are willing to take, and mapping out what your timeline actually is. If you don't know where your final destination is, how are you supposed to get there?

🏦 💵 Wealth Preservation - 4% Rule:

So hopefully one day we will all be able to shift gears from wealth creation to wealth preservation where the name of the game is how to drawdown from savings but not run out. This brings me to the 4% rule which is a general guideline for how much you can safely withdraw from a retirement account. Fun fact, "[t]he Four Percent Rule was created using historical data on stock and bond returns over the 50-year period from 1926 to 1976" (ref 2). If you are to apply this rule, be sure to understand what assumptions were made with this and what risk you are opening yourself up to. The first is simple, past performance does not guarantee future performance and so while this rule is considered safe, a protracted bear market during retirement could jeopardize your savings. This is especially true if you were more heavily exposed to stocks over bonds to try to continue aggressive growth. The 4% rule is also assuming a traditional 30-year retirement, so if you are part of the F.I.R.E. 🔥 movement then this is one factor you should account for. And finally as a medical professional, I would strongly encourage you to consider forms of insuring yourself against the unexpected whether it be short/long term disability insurance, life insurance, or long term care insurance. End of life or long term care is expensive and life comes at your hard and fast sometimes ... often with a curious sense of humor. For those want to play around with a hands on calculator for the 4% rule - check here.

👨‍👩‍👦 ✍️ Legacy Creation:

In life, I search for things that fill me up and give me a sense of purpose. It is what drives me to do what I do as when my life is over, I hope to have had a positive impact on as many people as possible. This is why of all my investing accounts, my Donor Advised Fund is by far my favorite. You don't have to wait until the end of life to create legacy impact and if you are filing for itemized tax deductions and give charitably, I would encourage you to explore the additional wrinkles a Donor Advised Fund or DAF offers. For those that are currently in the wealth preservation phase of life ... I ask you do you have more than enough to last? If you do then maybe reconsider the conventional safe stock to bond ratio and consider setting aside a portion for legacy creation for your children and grandchildren. With that money you can take on the higher risk because suddenly you are investing again for a very long time horizon ... just my two cents. This is an area where I think talking with a professional is incredibly helpful as the rules and regulations are constantly in flux and this is not something you want to make a mistake with ... as that problem would then be passed on to those that you love.

📖 References:

1. https://www.investopedia.com/articles/investing/062714/100-minus-your-age-outdated.asp

2. https://www.investopedia.com/terms/f/four-percent-rule.asp

📚Other Good Reads:

- https://www.fool.com/retirement/strategies/asset-allocation-by-age/

- https://www.cnbc.com/2020/11/24/heres-when-active-mutual-funds-tend-to-outperform-index-funds.html

- https://www.fidelity.com/learning-center/trading-investing/markets-sectors/intro-sector-rotation-strats

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