Once you’ve painted a target on the wall, regularly assess how far off it you are, Faust says. It’s easier to make corrections farther out from retirement. By five years to D-Day, you should be heading for a bull’s-eye.
Consolidate your accounts and investments. By 40, you may “have a lot of different accounts scattered all over the place,” Faust says. The more spread out your investments become, the harder they are to manage.
As you consolidate, watch for overlap in your investments. Do you have the same fund in all of your accounts? Or do multiple funds all have significant holdings of the same stock? Most financial firms provide free portfolio analysis tools that can help you spot overconcentration.
Also avoid under-concentration. “You don’t want a thousand little positions,” Faust says. He calls such portfolios “hodge-podge portfolios.” Even though you have more money to invest in your 40s than you did at 30, your portfolio doesn’t need to be any more complicated.
You should have a portfolio of “meaningful parts that work together,” Faust says. If a fund you bought at 20 or 30 is still doing what you intended, there’s no reason to change it, he says.
How to invest in your 40s. With 50 to 60 years still ahead, you need a relatively high allocation to stocks to prevent running out of money in retirement.
“It’s not unusual for our clients to have 70 to 75 percent of their portfolio allocated to [globally diversified] equities,” Farrell says. He recommends two-thirds domestic to one-third international stock.
Within fixed income, diversify across core government bonds (munis in taxable accounts), high yield bonds and emerging market debt in decreasing proportion. For instance, you might allocate 12 percent of your bond portfolio to emerging market debt, with a little more than that in high yield and the bulk in core bonds, he says.
Investing in real estate and startups. As your wealth grows, consider investing outside the stock market.
Your 40s are a time to learn new things, Farrell says. Broaden your investment horizons with other income sources like physical real estate, angel investing or even starting your own business, he says.
For instance, renting out a future retirement home would let you use the rental income to pay down the mortgage so you end up with a debt-free home in retirement, he says. And in the meantime, you’ve created another income source for yourself that isn’t correlated with the stock market, meaning if your investments stop paying, your rental still will.
As with all investing, diversify your alternatives. Farrell suggests having two to three alternative investments in any combination of real estate, angel investing or small businesses.
Whatever investments you use, make sure they’re in areas you’re familiar with. “The worst thing you can do is buy into an idea you don’t really understand,” Farrell says. Get professional guidance and keep any investment a small portion of your overall portfolio – 5 to 10 percent for most investors, he says.
In your 40s, you can take advantage of these riskier investments because you still have time to recover if they fail and can capitalize if they succeed.
At the end of the day, the future is long and uncertain. Investing in your 40s requires a willingness to stay aggressive and, as Jerry Maguire would say, find new ways to show you the money.