Q: What's the best way to invest $12,000? I am 46 years old.
A: The mid-40s is a tricky age for investing because you might find yourself torn between short-term and long-term goals. There is no way to responsibly give you a definitive answer without knowing the specifics of your situation, but there are some key questions that will help guide you to the right decisions.
Here are three questions that should help, discussed in the context of an investor in your age group:
1. What are you trying to accomplish?
In your mid-40s, you are far enough along in your career that you should definitely be building up a retirement nest egg, but you might also be facing shorter-term financial obligations like mortgage payments or sending kids to college. These goals require very different investment approaches. If you are just focused on retirement, at your age you should have a long-term time frame and thus be invested primarily for growth.
As growth investments can be volatile, diversification is important, but generally speaking with 20 or so years to retirement, a stock-bond mix with an emphasis primarily on stocks would be appropriate. However, if home payments or college create more immediate demands, you may need to be much more conservative. For those needs, try to match certificate of deposit terms with when those payments are coming due, and get the best CD rates you can within those terms.
2. Where does this money fit?
In deciding how to invest this money, you need to look at what other assets you have. For example, you may be juggling short and long-term goals, but already have money allocated to more immediate needs. That would allow you to take a longer-term approach with this $12,000.
Conversely, if you have a solid pension plan to look after your retirement needs, you might want to invest this money in CDs, savings or money market accounts where it can be more available for short-term needs. If you want to pursue both retirement saving and shorter-term goals, it would clarify things if you divide this $12,000 between the two and invest those two pools separately, rather than try to take a middle-of-the-road approach that serves neither goal properly.
3. What is your personal comfort level with risk?
On paper, it is likely that someone your age should own stocks, but that also depends on whether you have the risk tolerance for the possibility of losing money. Just keep in mind that at the other end of the spectrum, deposit vehicles like savings accounts have had trouble keeping up with inflation in recent years, and that loss of purchasing power is also a form of risk.
People your age are usually close to their peak earnings years. That also means that these should be your peak years for saving money. So, beyond the question of what to do with this $12,000, you should be asking yourself what you are doing to continually save money and add to that $12,000.
Comment: Are you in your 40s and have investments? What are you putting your funds toward?
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