Invest Aggressively While Young

February 21st, 2007  |  Published in Asset Allocation  |  1 Comment

Do you know why the experts recommend that young investors should be aggressive while older investors should be more conservative? It comes down to the fact that in the long run the stock market, and investments in general, appreciate but in the short run they can be entirely random and extremely volatile, so if you can stick out the roller coaster, because you have more years to wait, then you can take the volatility and perhaps take advantage of the higher growth rates.

Take for example a hot new technology or biotech company. In a single day you can see double digit gains or losses, over a week can you see it double or half its value, but if you are willing to wait a year, two years, ten years; you can potentially see higher growth rates than if you invested in a blue chip technology company like Microsoft. If you are older, you have a shorter amount of time to “wait” for a hot company to come back from a big loss and so you’re less willing to accept the risk involved with huge short term gains. If you’re young, you can risk that because if you are chasing a big spike but instead see a big drop, you can just wait for the stock to recover (hopefully it recovers). See the logic?

So, that’s why they recommend that you take your age minus 120 for your percentage in stock, the rest in bonds, because stocks are seen as riskier and bonds are seen as safer. If you’re young, swing for the fences. If you’re a little older, bat for average and keep on playing. 🙂

  

Responses

  1. Nick says:

    February 26th, 2007 at 3:18 pm (#)

    I think you meant to say “120 minus age”.

    120-23 = 97% in Stocks 3% in Bonds. Since I’m a little more conservative than your average 23 year old, I’ll round it up to 95% Stock, 5% Bond.

    Now, how should we break it down among asset classes?

    35% Large Cap, 35% Small and Mid, 25% International, 5% Bond?