How should you invest your money? 

Dan was furious.

He didn’t have the money.

He needed to pay for his half of the deposit on the house that him and his partner planned to buy for years.

It was the dream house.

It was all they ever wanted.

But when the time had come to put the deposit down, Dan couldn’t afford his half.

‘What do you mean you don’t have it anymore?’ cried his partner.

‘It’s gone down, the stock market. It was all tied up in stocks and shares.

Some guy on instagram said that if I was in my 20s I should be investing at least 90% of my money in stocks to get the biggest gains…

I just blindly followed his advice.

I can’t believe it I’m so sorry.’

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I don’t know a person called Dan who this happened to, but I can guarantee someone somewhere has had this experience.

The problem with getting unsolicited financial advice online is that it is rarely personalised to you and your situation.

And so you just take advice from someone who is in an entirely different life situation and who is investing for entirely different goals.

So in this post I want to make a few things clear.

First – you need to invest with your life goals and dreams in mind, not someone else’s.

Second – this means investing your money in different things depending on the time horizons you’re working towards.

Third – you need to understand different strategies and which ones are best for different life situations.

So, let’s get into it.

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I guess it goes without saying that you should be investing your money and making it work for you instead of just having it sat in your bank’s current account earning 0.3% interest.

You get basically 0 benefit from this. And unless you need the money in the next 6 months or so, it rarely pays to do this.

In every other scenario, you’re almost always better off opening a Stocks and Shares ISA, which I wrote about here.

But we’re talking about something else today.

We’re talking about what you should invest your money in, depending on where you’re at in life. 

Before the juicy stuff, I should layout some quick definitions first. 

You can (broadly) invest in 3 main categories in the stock market:

Obviously, if you had a crystal ball, you’d be able to call every movement of the stock market and place all your money in stocks during a boom period.

And sell all of them at the peak, making a load of profit.

Then putting all the profit into bonds during the bust period.

But this is impossible for even the most experienced investors to do, and so isn’t a clever strategy.

We are value investors, long-term + passive investors, not speculators or gamblers.

We want the biggest returns for the least amount of work.

Now, conventional wisdom has traditionally said to invest more in stocks when you’re younger (80% say) and less when you’re older. 

The theory being that when you’re young you don’t need the money for 20 years so you can ride a few boom periods and grow your money tree with exposure to stocks and shares. However, when you’re older, you may need your money sooner and so it’s better to keep it safe in bonds.

The issue with this advice is that it is far too generic.

It’s really not helpful for everyone, because we’re all in different situations.

Take Dan, in his twenties, from the story above. He just blindly put his money into the stock market because someone on Instagram told him it was the right thing for young people to do.

But Dan needed the money for a deposit on a house and couldn’t afford a 20% dip in the stock market in the short run.

So when the stock market crashed and he didn’t have the money to pay for what he wanted in life, he was in a bad situation.

This is far from ideal.

In his case, he would’ve been better off just buying safe bonds and keeping it ticking over until he needed the money.

Or even just sticking his money in a high street savings bank.

The point is, just blindly following advice online isn’t good.

You need to work out a strategy that’s best for you.

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Let’s take a look at some broad strategies then, based off timelines for when you need the money as opposed to age.

The assumption here is that you’re investing this money each month after you’ve paid for your rent/food/necessities.

It’s the excess money you have each month that is going towards a house, or your children’s education, or your early retirement.

When I say stocks below, I mean a tracker fund like MSCI world, S&P500 or FTSE250.

When I say bonds below, I mean a government bond tracker like iShares Global Inflation-Linked Government Bond and a corporate bond tracker like iShares Investment Grade Bond Factor ETF IGEB.

Age is irrelevant.

–

Need the money: anytime in the next 6 months

Allocation: 100% in high street savings bank

–

Need the money: in 6 months to 2 years

Allocation: 90% bonds, 10% stocks

–

Need the money: 2 years to 5 years

Allocation: 75% bonds, 25% stocks

–

Need the money: 5 years to 10 years

Allocation: 50% bonds, 50% stocks

–

Need the money: 10 years to 20 years

Allocation: 25% bonds, 75% stocks

–

Need the money: 20+ years

Allocation: 15% bonds, 80% stocks, 5% commodities

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There’s a few caveats here; which focus around common sense and having a basic understanding of markets.

For example, if we’re living through a really grim recession and it’s only just started, and you need the money in the next 2 years, you’ll probably want to leave the stock market alone.

Bust periods usually last 2 years.

Boom periods usually last 8 years.

Meaning the cycle is 10 years.

Roughly.

So, likewise, if the world is recovering from a bust and the stock market is beginning to pick up again, and you need the money in the next 2 years, you may consider putting more in stocks.

These are by no means hard and fast rules, they’re just guidelines.

Broadly, the message is that you always need a spread between bonds and stocks.

And you always need to consider your own time horizons and needs.

Love, as always,

Max