Investing Based on Age

Another popular idea promoted by the mainstream financial media is that of investing based on your age. Typically these methods use specific asset allocation models. Basically, the younger you are, the higher the percentage of your assets that would be allocated to high-risk investments. The “rationale” for this is that since one has longer to live one has a longer time period to recover from bear markets. Anyone who held through the crash of 1929, for example, needed until 1944 just to get even. As one gets older, the asset allocation models call for you to take on less risk and allocate a greater amount to income generating investments. There are many different models or formula’s for this method, however,they all typically would have someone in their twenties or thirties hold as much as 80% or more in high-risk stocks or aggressive mutual funds. The logic here is that the young will have more time to recover. A basic assumption, and a dangerous one, is that as a person gets older and goes from one part of the allocation model to the next, they have been successful in growing their money in the previous phase. Each phase of the investment cycle is assumed to have achieved the desired results before going on to the next. A person with a very high allocation to speculative stocks in their thirties, by the time they are in their fifties, is assumed have been so successful that all they need do is simply move the profits over to the less risky investments. The problem with this is that financial markets may not have been cooperative with the model. Your investments may not be profitable in the time-period that you thought you could take such high risks. Then you could find yourself in a position where you have less, and you’re older. You are much better off to take risk when it makes sense to take risk. The financial markets have no conception of how old you are, and they certainly don’t care that you’re allocating you’re assets based on your age. If the age of something has to come into an investing decision at all, then let it be the age of the bull or bear market itself. That at least may give you some indication of value or at least a feeling for where the market may be in general terms. Remember that there have been bear markets in the past that have lasted for many years. Some are even dated in decades. I mentioned the crash of 1929,earlier and how it took until 1944 just to break even. Actually, 1944 was only the break-even point for those who held dividend-paying stocks in 1929. If you were holding the typical higher-risk stocks you wouldn’t have gotten your original investment back until 1954! This is the most popular example of waiting a long time for stocks to come back, but it is by no means the only one. History shows many times where it took a significant period of time to recover from what analysts call the doldrums – assuming you had the tenacity to hang in there and not sell. Just as with dollar cost averaging, this is quite a big assumption. Allocating your assets based on your age may at first sound like a simple, easy, and reasonable thing to do. But think twice before tying up 80% or 90% of your assets for years just to fit some asset allocation strategy that assumes each period of your investments proves successful. Remember to ask your self if you would be willing to stick to it in tough times, idly sitting by in a bear market as your higher-risk portfolio goes down harder and faster than the general market averages. Instead, why not consider taking on less risk; invest in more conservative assets that protect your hard-earned money, so that by the time you retire you’ll have built a reliable, solid base. You can make time work for you without having 80% or more of your assets in high-risk investments. It’s better to make a little less than to lose a lot. Nobody looks forward to seeing minus signs. No matter how well you have the potential to do It is not worth a nickel if you don’t also get to sleep nights .

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