Comments on: Young Investors Should be More Conservative?

By: mike

mike — Wed, 03 Jun 2009 15:53:52 +0000

Compare the two in the long run. If you put in a fixed amount every year with a 10% return over 40 years versus putting in the same fixed amount with a 9% return over 40 years, you'll end up with 32% more…meaning you need to contribute about 3/4 as much to the 10% return portfolio as you would to the 9% return portfolio to acheive the same goal.

By: Gerard

Gerard — Wed, 03 Dec 2008 03:05:31 +0000

I think the key issue being missed is the ultimate reason for investing. Are you looking to grow your funds aggresively or obtain a reasonable return with some potential downside or safeguard your current investment. The equation of risk depends on whether you’re talking to a 20yr old who’s currently earning 20K or one earning 200K and what lifestyle they’re willing to accept in retirement. A blanket, one-size-fits-all approach is generally useless to everyone since it is too general to meet anyone’s specific circumstances.
The other thing to consider is each person’s risk threshold. Eg. I’m quite happy with risky investments accounting for 15-20% of my portfolio as I can mentally accept losing that amount. However, anything over that would lead to sleepless nights, no matter what return I may be able to obtain…
To each their own…

By: Mark

Mark — Wed, 03 Dec 2008 00:39:06 +0000

Interesting take. I have found that older people tend to chase growth more than younger people. They try to make up for a lack of savings when they were younger.

By: bigbartha

bigbartha — Tue, 02 Dec 2008 05:26:52 +0000

a) I don’t understand why Meg has 95%, and not 100%, of her retirement portfolio in stocks. I’m in my mid-20s and have 100% of my investments in stock (Roth IRA’s and Roth 401k’s). If you’re younger than 35, you have at least 25-30 years that you could keep this allocation. While stocks don’t always perform in the short-term, they consistently out-perform other traditional asset classes, such as bonds, in the long-term. A perfectly diversified stock portfolio by definition will always out-perform a perfectly diversified bond portfolio if you have a long enough time horizon. (Bonds can’t actually pay returns higher than the stock market because there would be no way for the issuers to consistently generate the income to pay the bonds).
Meg mentioned that the objective is “to acheive our goals while taking as little risk as possible.” I disagree. One has to compare the risks and rewards of each investment opportunity. If 1) the possibility of rewards outweigh the possibility of losses, and 2) you’re willing to bear the risk of losses, then you should be willing to make that investment.
I particularly find Meg’s goal difficult to swallow because 1) it appears to be willing to settle for less (mediocrity in returns), rather than seeking to maximize returns, and 2) it’s difficult to predict how much money we’ll need in the future.
b) With respect to the conservative vs. aggressive investing, diversification is key. Not too many people can accurately predict which market sector or which global region will produce the greatest returns, and nobody has demonstrated how to find these people. That being the case, it makes sense to diversify across both sectors and geographic regions.

By: PennySeeds.com

PennySeeds.com — Tue, 02 Dec 2008 00:45:53 +0000

I’m a firm believer in not keeping all your eggs in one basket. I want to collect a lot of different stocks in quality companies for the lowest prices.

I like picking my own individual stocks, because I just plain don’t trust other people with my money.

But I don’t place all my riches in such volatile holders. I have plenty safer reserves in cash, and CDs as well.

Diversification will be your salvation.

By: Craig

Craig — Mon, 01 Dec 2008 21:33:50 +0000

I am a post grad and to be honest have very little knowledge of investing or what/how to invest. To me it’s a huge gamble and I don’t have the knowledge to just put money into the markets especially now. But I am young and hopefully the economy would bounce back, so maybe now is a good time to buy. I have been told to put money into a mutual fund over individual stocks. What do you think?

Craig
http://www.budgetpulse.com

By: Kyle

Kyle — Mon, 01 Dec 2008 19:45:59 +0000

The article’s argument makes intuitive sense if you think about it. Younger investors CAN invest more aggressively if they want to. Many will choose to do so. Many will choose not to. A young investor with 50% of their portfolio in bonds is still much better off than one who shot for the moon, suffered terrible losses, and swore off the stock market forever.

By: Slinky

Slinky — Mon, 01 Dec 2008 18:39:38 +0000

This is what comes of generalizing. Young people CAN afford to be more aggressive…if they want to. They don’t need to though. That’s the point of starting young. Just because you’re young doesn’t mean you should push your risk tolerance more than you’re comfortable with.

By: Steve Braun

Steve Braun — Mon, 01 Dec 2008 17:47:21 +0000

Sheryl Garret is absolutely correct. There is no need for young persons to tilt their asset allocations to the risky side. Taking excessive risks at a young age, and losing, negates many of the advantages of compound returns over time.

It’s important to note that Sheryl distinguishes between “aggessive” and “risky.” She doesn’t mean young persons should be “conservative” in the classic sense because her recommendation is 80% stocks. That’s an aggressive allocation of equity. What she’s saying is that within that allocation of equity, don’t bet the farm on a few frothy sectors in hopes of hitting it big (which is risky).

To boil it down: Be aggressive with respect to your allocation in equities, but be prudent (conservative) in your diversification of risk among equities. Diversify, diversify, diversify!

@ Meg — Given what you shared, I’d characterize your current portfolio as highly speculative with about 24% in emerging markets and another 24% in non-US developed markets, plus the “fair dose” of small caps and REITs. There’s nothing wrong with these particular investments as long as your money is prudently allocated among them all in the right proportions. Your current allocation is out of whack. I’m glad Sheryl’s comments have changed your mind. Now act on it!

On a related note…Given that the majority of your money is heavily weighted toward investments that have been “hot” in recent times (at least up through 10/2007), could your selections have been driven by performance chasing on your part? I hope not because that’s usually a recipe for disaster, leading many to buy high and sell low. It’s better to find the proper allocation and stick with your plan, rather than worrying about which assets or market sectors are hot or cold.

By: Fabulously Broke

Fabulously Broke — Mon, 01 Dec 2008 17:45:22 +0000

I definitely invested in index funds most of my life and don’t plan on changing

The only other stocks I’d consider are Google, Coca-Cola and Wal-Mart