Stocks, Age and Asset Allocation

by James & Miel on January 8, 2009 · 0 comments

Hi All,

This posting is about age and asset allocation. It sounds boring, but since most peoples wealth building varies over the life span, its important to consider how age impacts your investment strategy.

When thinking about age, remember the younger you are, the greater the amount of long term money should be in stocks. The main idea behind this is stocks have historically outperformed other asset classes. So, when young people put their long term investing dollars into stocks they theoretically maximize their overall return. While at the same time, older people have a greater proportion of bonds or cash, thus allowing them optimize the balance of risk vs. return.

The rule of thumb is: 100 – your age = % in stocks.

For example, someone who is 33 should have approximately 67% of their long term investment funds in stocks (right, 100 – 33 = 67).

However, like most investing wisdom, you should take this with a grain of salt. There are at least two problems with this rule.

First, it relies on historical information about the long term return on equities versus other types of assets (bonds and real estate). The rule is based on the historical performance of US markets since the 1930s. What people don’t tell you isother markets, like postwar Japanese equities and US stocks before 1930 showed far different patterns.

Second, credible investment thinkers say even with stock market risks, one is still better off fully in stocks. David Carlson is a proponent of this philosophy. However, the recent extreme losses in the stock market may have changed the views of those who argue this perspective. Its too soon to say who is correct, but recent stock performance notwithstanding one can reasonably say it makes sense to be 100% invested in equities.

Thanks,

James

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