What’s striking about these findings is that they’re basically a reversal of conventional financial wisdom, which holds that younger investors should take on more risk than older ones; since they have more time before retirement, they can afford to be more aggressive in search of greater gains, which are then compounded over decades. Older investors, however, won’t have as many years before retirement to recover from potential large downturns in riskier investments. Younger investors are typically the ones who buy growth-oriented equities, while older folks are typically the investors moving their portfolio into less risky and income-generating investments.
Market Realist – The proportion of equity you should have in your portfolio depends on your age and risk-taking ability
It’s been said that the amount of equity (SPY)(IVV) you should hold in your portfolio is inversely proportional to your age. The rule of thumb is that the proportion of equity is 100 minus your age. For example, if your age is 25, the proportion of equity you should hold in your portfolio is 75%. The above graph depicts this.
However, you may not adhere strictly to this rule. If you have a high risk-taking ability, you may hold a higher proportion of equity in your portfolio. However, you may also hold some amount of bonds, perhaps corporate (LQD)(AGG) and Treasury (TLT)(IEF), to diversify your portfolio or for income. This depends on your goal.
Young individuals should invest the bulk of their portfolios in equity.
The next part of this series explains why some young investors have become conservative. Part 7 explains why they should not be conservative.