If you are just starting out in your job after graduation or whether are a young professional already, the question always is: “How much money should you invest in the stock market?”
That’s a very good, and very valid question, and I will try to answer it to the best of my ability.
Stocks – in general – are a vital pillar of every long-term investment strategy, and, in my opinion, everyone should own a diversified portfolio of dividend-paying stocks.
Stocks – by far – produce the best returns for investors over the long-term. Market swings aside, if you invest across the full length of a business cycle, you are more than likely than not to come out on top with your stock investments.
Depending on which study you want to use, long-term stock returns usually range from 7-9 percent. In layman’s terms, if you invest in stocks consistently, you can expect to earn an average of 7-9 percent over the long haul, i.e. 10 years or more.
Earning seven, eight or nine percent per year over the long-term, on average, is a sweet deal, especially in today’s low-yield environment that leaves millennial investors starved for investment options. However, if you have the patience and discipline to deal with the inherent ups and downs in the stock market, equities are a great way of building long-term wealth. And if you chose to build a high-quality dividend portfolio, you don’t even have a lot to do in terms of portfolio maintenance.
What Percentage Of Your Assets Should You Put Into Stocks?
I sometimes get the question of how much money as a percent of an investment portfolio should be invested in stocks. And that’s a real tricky question.
This is because investors differ greatly in terms of financial objectives, risk tolerance, education, investment horizon etc.
The advice typically is to have a diversified portfolio of stocks, bonds, real estate, commodities, and cash (I don’t count cryptocurrencies here because they are a FAD and are doomed to fail, in my opinion).
That said, though, if you are still quite young, like in your 20s or early 30s, I always recommend to invest as much money as possible into high-quality dividend-paying stocks with a history of dividend growth for shareholders. The reason why you can afford to put so much money, i.e. 100 percent of your portfolio into stocks, is because your investment horizon is extremely long, probably 30+ years. With this long a time horizon you can easily sit out market downturns or recessions, and still come out way ahead. If you haven’t already, check out my blog post about the power of compounding, which I highly recommend you to read!
As you get older (you may have a family by then with children and more financial obligations), it makes a lot of sense to scale back your exposure to equities. Once you are past the age of 35 years I’d suggest you to reduce your exposure to equities down to 80 percent of your portfolio value, and increase your investments in bonds to 20 percent.
It would also be prudent to shift more funds into low-risk, income-producing assets, i.e. bonds, as you progress through your career and approach retirement age. The reason: You have less time working in your favor: It might take years to recover from a recession, and you don’t want your retirement fund to take a massive hit just before you are planning to retire!
If you plan to retire at the age of 60, the preferred allocation would be 0-10% exposure to very low-risk equities and 90-100% in high-quality investment-grade bonds. The older you are, the less risk you want to assume, and that’s especially true if you disproportionately rely on your investment portfolio to fund your retirement.
What Kind Of Stocks Should You Look At?
This is not investment advice, obviously. But here are a couple of qualities that I look for in my dividend-paying stocks:
- History of earnings and dividend growth
- Strong balance sheet
- Capable and experienced management team
- Slow, but steady growth
- Resilience to market downturns and recessions.
Naturally, companies in the telecommunications, healthcare and utility sectors are interesting candidates for further investigation. Real estate investment trusts are also attractive income vehicles. I specifically like a commercial property REIT called Realty Income, Inc., which trades on the stock market under the ticker symbol “O”. Realty Income has a large portfolio of retail properties spanning the United States, and the company has even managed to raise its dividend payout during the severe downturn of 2008 and 2009.
Generally speaking, it is probably a good idea to buy stock in companies that produce products and offer services that you like and use yourself. You can regularly read about and find investment ideas on sites such as Forbes.com or CNBC.com. Reading economic magazines such as The Economist also helps.
To Sum Up
In a nutshell, if you are young (below 35), invest as much as you possibly can into quality dividend-paying stocks, preferably those that have a flawless history of growing their dividend payout, even during a recession. As you grow older and your financial obligations increase (and your ability to absorb risk decreases), reduce your equity exposure and shift funds into low-volatility investments such as bonds.
The more diversified your portfolio, I.e. the more diverse your income sources (dividends, bonds, interest, real estate income, online income), the better your chances of building a fat nest-egg over time.
If you have any questions, feel free to leave a comment or send me a message through either FB or Instagram.