We have heard individuals ask how age should impact investment decisions. This is a great question and a timely one. Unfortunately, many Americans are not investing appropriately for their age--including millennials, who are often investing too conservatively.1
As a rule of thumb, we know that younger investors should be more aggressive and older investors more conservative--but we want to go into a little more detail on age-based strategies.
After determining investment objectives, time horizon, and risk tolerance/capacity, investors then configure a blend of various asset classes within a portfolio. This is known as asset allocation, which is a key factor in a portfolio’s overall return as well as its volatility.
The primary asset classes are equities (stocks), fixed income (bonds), and cash (money market accounts, and commercial paper and T-bills (cash equivalents)). When further diversification is desired, there are also precious metals like gold and real estate investment trusts (REITs)--and for some investors, more volatile assets like cryptocurrency. The key is determining the correct allocation and being able to stick to it.
Designing the Right Mix
For the sake of simplicity, let’s talk about a portfolio’s main components; stocks, and bonds. There are a few basic tenets for a starting point for allocation based on age.
Conservative Risk Tolerance: Age in Bonds -- This would entail a 30% allocation to fixed income products for a 30-year-old, a 50% allocation for a 50-year-old. However, this may be too conservative for many investors.
Moderate Risk Tolerance: Age Minus 20 in Bonds -- In this strategy, a 60-year-old investor would have a 40% allocation to bonds, while a 25-year-old investor would have a 5% allocation.
Aggressive Risk Tolerance: Age Minus 40 Multiplied by 2 in Bonds -- Here, a 50-year-old investor would have a 20% allocation to bonds and 80% to stocks. This configuration showcases how a target-date mutual fund dynamically shifts asset allocations over time.
Rule of 110 in Stocks -- This is simply taking your age and subtracting it from 110. So, a 30-year-old investor would have an 80% exposure in stocks, while a 60-year-old would have a 50%.
A Task Best Done With Professional Guidance
While these mathematical concepts are great starting points, they do not factor in each individual’s risk tolerance/capacity or investment objectives. That is one of the reasons we are here -- to help determine what is right for you.
Please feel free to reach out to us with any questions regarding asset allocation, the stock market, or your specific investments.
This presentation is not an offer or a solicitation to buy or sell securities. The information contained in this presentation has been compiled from third party sources and is believed to be reliable; however, its accuracy is not guaranteed and should not be relied upon in any way, whatsoever. This presentation may not be construed as investment advice and does not give investment recommendations. Any opinion included in this report constitutes our judgment as of the date of this report and are subject to change without notice. The views expressed are those of the author as of the date noted, are subject to change based on market and other various conditions. Material discussed is meant to provide general information and it is not to be construed as specific investment, tax or legal advice. Keep in mind that current and historical facts may not be indicative of future results. Certain risks exist with any type of investment and should be considered carefully before making any investment decisions. Keep in mind that current and historical facts may not be indicative of future results. The information provided is for educational purposes only and not intended to provide any investment, tax or legal advice. Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website.