- ETF manager Taylor Sohns says that age shouldn’t necessarily dictate how you invest.
- Instead, think about your time horizon, which will depend on your specific goals.
- For example, if you want to save up to buy a home, your time horizon might be three to five years.
When it comes to investing, age matters.
The sooner you put your money to work, the more you can take advantage of compound interest. People who start investing in their 20s have a major advantage over someone who starts in their 40s.
That said, your age is not the most determining factor when it comes to selecting how to invest.
“The number one thing that dictates how you invest is not your age,” ETF manager Taylor Sohns told Insider. “What should dictate it is your time horizon.”
Your time horizon is the time you plan on having your money grow in the market before pulling it out for a specific goal. For example, if you want to save up to buy a home, your time horizon might be three to five years. If you’re preparing for retirement, your time horizon depends on your expected retirement age.
When it comes to choosing where to invest your money, your specific goals — and when you actually need the money to achieve them — are more important than how old you are.
You might be in your 20s, with a lot of time on your side and the ability to take on more risk when it comes to your retirement dollars, but if you’re saving up for a short- or medium-term purchase, you don’t have as much time for your money to bounce back if the market dips.
As Sohns puts it: “You may be 25 years old, but if you’re going to purchase something in five years, like a house, that dictates how you invest, not your age.”
If that’s the case for you, you might want to invest your down payment-specific dollars in something more conservative that is less likely to fluctuate drastically.
On the flip side, you may be close to retirement or even in retirement, but that doesn’t always mean you have to be extra conservative with how you invest your money.
“If you’re 75 and you’ve got $100 million, you can be as aggressive as you want because that’s likely getting passed down to your heirs,” said Sohns. “That’s not money that needs to be ultra-conservative, like it would have to be for a 75-year-old that has to live off their investments.”
His main point is that your age is just one factor when it comes to figuring out how to invest. Rather than determining what type of investments to buy based on how old you are, spend time thinking about your financial goals and when you want to achieve them.
Once you have a specific goal in mind, you can start figuring out the smartest way to invest to achieve it.
“The goals are the top of the funnel that dictate what you’re trying to do with your overall investment,” said Sohns. “If your goals don’t align with what the asset allocation looks like, you can put yourself in a tough spot.”
When it comes time to actually put your money to work, spend time researching various investment vehicles and “invest in what you know,” he advised. As a rule of thumb, “if you can’t explain something to me, you can’t buy it.”