By JLP | November 30, 2008
I read an interesting and – shockingly – unique piece of financial advice the other day which I’ve been turning over in my mind ever since.
The advice was embedded in a very typical personal finance article on retirement under USA Today’s “21st Century Retirement” collection. The title of the article is How should you invest in a bad economy? Stocks? Bonds?
You can imagine the predictable advice this (nevertheless valuable) article spelled out; the experts suggested what financial moves people should make now, based on their ages.
Here’s the interesting part, outlined under the “If you’re in your 20s …” section:
One mistake young investors make is confusing the principle of investing aggressively with making risky investments, says Sheryl Garrett, founder of the Garrett Planning Network, a network of advisers who charge by the hour. In your 20s, you should be putting at least 80% in stocks.
But ignore the advice that you should make your riskiest investments when you’re young. You have lots of time — which means you can invest in a conservative stock fund, accept a lower return, and still reach your goals without worrying about catastrophic losses. “There’s no need to be in tech stocks or emerging markets,” Garrett says. “You can find great opportunities in stodgy old-fashioned blue-chip stocks.”
This has actually never crossed my mind, I’m sort of embarassed to say. But it’s remarkably true and sensible. I don’t need risky alternative investments – nor do I need to pay more for funds which offer them – because of all the years I have until retirement. This seems counter-intuitive since you always hear that investors should be more conservative the older they are.
That’s true, but there’s a window. Very young investors can afford to be conservative because compound interest and time will account for most of the gains – we don’t need the to take the risk that comes with the possibility of an extra percentage point or two of return. Older folks need to be conservative because they have to make what they have last – they don’t have time to earn it back if they make risky investments and hit a long losing streak.
The middle group, those starting in their late 30s or 40s or even 50s, are the group who might most reasonably choose riskier investments – because they might really need the possibility of that extra percentage point or two of returns.
This seriously might change my asset allocation forevermore. I am currently a pretty risky investor. My retirement portfolio is 95% stocks, almost half of which are international, almost half of which are emerging markets. I’ve also got a fair dose of small caps and REITs. Basically everything including the kitchen sink. But – duh! – because I’m in my 20s I can, and perhaps should, be less aggressive with my investments and still reach my goals.
And isn’t that the objective – to acheive our goals while taking as little risk as possible? After all, if you won the lottery and were set for life, wouldn’t you just park at least most of that money in cash and bonds? You wouldn’t need to risk it by investing in stocks and other riskier investments.
More from Meg at The World of Wealth