Advice for Those Starting to Invest Later in Life

Dear SmallIvy,

I am receiving Social Security Disability benefits. I would like to start investing but I am not sure where to start.   I am a late start investor ( in my 50’s).  What would you suggest?   Last but not least I read the invaluable advice you shared about what the author J.D. Spooner said about investing. Thank you so much.



Dear Samantha,

To best answer your question, the first thing to understand is your overall financial situation and why you’re investing in the first place.  Before you should begin investing, you should make sure that you are on firm financial footing which means that:

1) you have written a yearly budget where you list all of your income and expenses and verified that the amount left over after you have paid for all of your expenses, called your free cash flow, is positive and

2) have an emergency fund of about $10,000 saved up. 

If your free cash flow is zero or negative, you are spending all of the money you make and then some, so you’ll need to either increase your income or cut your expenses.  If you try to invest but don’t have the free cash flow needed to do so, you’ll just end up selling your investments because you’ll need money for a bill that comes due.  Because the price of the assets (stocks and bonds) that you’ll buy will fluctuate randomly over the year, you are just as likely to have lost money than to have gained money when you are forced to sell to raise cash.  Even while on disability, there are a lot of “side-hustles” you can do online from home today because of the internet.  Some people do things like serve as virtual assistants for others, answering emails and posting tweets on Twitter while the other person is on vacation or so that he/she can focus on other things.

Likewise, if you don’t have a full emergency fund, you’ll have something like a car breakdown or medical bill come up and you’ll need to sell out to raise cash.  While it may take some time, it is worth it to focus your free cash flow towards building up your emergency fund before starting to invest. To learn how to build up an emergency fund, check out The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness by Dave Ramsey.  Dave Ramsey is the master at teaching people how to budget and save.

(This post contains affiliate links.  When you buy something through one of the links on this site, The Small Investor gets a small commission.  This costs you nothing extra, but keeps me providing great content for free.)

The second thing to understand is why you’re investing.  You could be:

1) Investing to build up money for retirement. 
2) Investing for extra income now and in the future. 
3) Investing for fun. 

Let’s take each of these possibilities separately.

1) Investing for Retirement:
If you’re investing for retirement, you have perhaps 15 to 20 years until you’ll need the money, and at that time, you’ll really need the money.  This means you can’t take substantial risks to increase your returns.  For someone who was in his/her 20’s, buying only stocks (individual stocks and stock mutual funds) could make sense since they have 40 to 50 years before retirement. 

Investing in all stocks would be too risky for someone like you with only 20 years-to-go. To see this, understand that the value of investment assets such as stocks fluctuate randomly.  You cannot guarantee what the price of a stock or will be in one year, or even in three to five years.  If you look out to ten years or more, and you buy a mutual fund or a set of stocks, you can start to get an idea of the range of returns by looking at past results from similar investments.  For example, the average annual return for a broad stock mutual fund (like the Vanguard Total Market Index Fund or an S&P500 Index Fund) over a ten year period has historically been in the range of about 2% to 15% with an average around 10%.  This means that your mutual fund will most likely be worth at least what you paid for it if you hold it at least 10 years.  If you hold for five years or less, all bets are off.  If you hold for 15 years or more, average returns tend to hone in on the 8-15% range with an average around 10-12%.

This means that you should not invest any money that you will absolutely need within about 5 years; therefore, while you will almost definitely make more if you invest in a broad mutual fund for 10 years and likely make more investing for 5 years, you might actually do better with the money in a bank CD for periods of 5 years or less because a guaranteed 2% in a CD might beat a random -10-15% in a mutual fund. 

Starting from the Basic, All-Purpose Master Portfolio described in this article here, the way that you would reduce risk is by including a larger portion of fixed-income assets like bonds and REITs in your portfolio.  (Bonds are loans made to companies that pay a fixed interest amount each year.  REITs are baskets of real-estate properties like apartment buildings or malls that pay you rents in addition to allowing for some increases in value as the prices of the properties increase.)  For example, a portfolio with target allocations something like this would make sense for someone in their early 50’s investing for retirement:

30% General Large-Cap US Stock Index Fund

15% General Small-Cap US Stock Index Fund

15% International Stock Index Fund

25% General US Bond Index Fund

15% US Real-Estate Investment Trust (REIT) Fund

(Note, the percentages shown are called your target allocations, which are the percentage of your portfolio – your investment money – you want invested in each fund.)

To get started, you would save up your free cash until you had about $3000, then start an IRA account with a fund company like Vanguard or a brokerage like Charles Schwab.  You would then buy the first fund on the list, the Large-Cap US Stock Fund.  You’d then save up another $3,000 and buy the next one on the list, and continue until you had made an investment in each fund.  You would then rebalance your portfolio to set the percentages shown above.  (Many fund companies have tools to allow you to do this easily through their online systems, or you could call and ask them for help.)  You would then continue to save up money and direct future investments to each of the funds to increase whichever fund was below your target allocation.

Note that it is very likely your bonds and REITs would go down in price if the Federal Reserve continues to raise interest rates as they have been doing.  This will reverse itself, however, when they eventually start lowering interest rates again.  At that point, your funds will go back up in price.  Just ignore the price of your fixed-income mutual funds and use the opportunity to get in at lower prices.

If you want to learn more about mutual fund investing, I’d recommend The Bogleheads’ Guide to InvestingThis is written by a group known as the Bogleheads, who follow the advice of Jeffery Bogle, founder of Vanguard and a pioneer in the use of index mutual funds.

2) Investing for extra income now and in the future:
Another reason to invest is to increase your income.  You can think of each stock or bond that you buy as a little apartment that you rent out to someone so that you can collect a monthly rent payment.  The nice thing about stocks and bonds is that they don’t call you at 2 AM to complain that the furnace is broken.

If you’re investing for income, you’ll want to mainly pick assets (bonds, stocks, real-estate) that pay a high dividend or interest payment.  You will still want some of your investments, however, to include the ability to grow in value with time (also known as appreciating).  This growth will both increase your income over time and help to protect you from inflation.  Without any inflation protection, you’ll see your spending power decrease by about half every 20 years.

To gain income assets, you could start putting money into bond funds and REITs, with some money into stock mutual funds for the needed growth component.  Looking at the Master Mutual Fund Portfolio again, it might look something like this if you were trying for income:

15% General Large-Cap US Stock Index Fund

15% General Small-Cap US Stock Index Fund

10% International Stock Index Fund

35% General US Bond Index Fund

25% US Real-Estate Investment Trust (REIT) Fund

With each of these funds, you have the option to reinvest dividends and capital gains or not, meaning that money the funds generate is paid to you and placed in your account or the money generated is used to buy more shares. In this case, you would want to choose not to reinvest capital gains and dividends since you want to collect cash from your investments to spend now.  This is an option you’ll find when you look at your portfolio online.  If you can’t find it, again, just call or email the brokerage or mutual fund company and ask them.  Note also that you should be investing in a taxable account so that you can use the money without penalties, and that you’ll need to keep some of your money aside to pay taxes each year.

You could also seek out some individual stocks that pay a good dividend.  You should be able to buy individual stocks right through your account with your brokerage or mutual fund company.  These tend to be in the utility and banking sectors, but there are some in other industries as well.  These also tend to be old, well-established companies like McDonald’s and Home Depot.  You’ll want to look for companies that have consistently increased their dividend over a number of years.  While they may only be paying 2% now, if they increase their dividend by 15% per year, the amount you’ll be getting will double about every five years.  This means in ten years you’ll be receiving the equivalent of 8% per year on your money.  Wait another 5 years, and you’ll be making 16%!  To learn how to use dividend investing, check out Dividend Investing Made Easy

3) Investing for fun:

Maybe you have your needs taken care of and you just want to invest for fun.  Starting in your 50s, that would be the main reason to invest in individual stocks, as opposed to mutual funds.  As I describe in my book, The SmallIvy Book of Investinghere you’ll want to choose a small number of stocks and build up large positions in them over time.  You’ll want to gather positions of 500-1000 shares over a period of years.  Choose what you consider to be the best companies in different industries with a lot of room for growth that are making profits consistently and growing their business each year.

Once you have acquired a position, plan to hold for several years.  It often takes time for a company’s stock to appreciate.  When it does, it often occurs over a short period of time, a few months or even a few weeks.  Plan to hold onto your investments unless 1) you need the money, 2) you no longer believe the company has good growth prospects, or 3) the position becomes so large that a substantial loss would greatly affect your life.

Learning to pick stocks is an acquired skill that takes practice.  Expect to have some stocks that decline or perhaps just don’t grow as fast as the markets.  You may find that you would have been better off just buying mutual funds (which is why you should use mutual funds for your critical investing).  If you can pick a few great companies, however, you can outperform the markets and make some very substantial gains through individual stock investing.

Have a burning investing question you’d like answered?  Please send to or leave in a comment.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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