When to Break Investment Rules – Not Investing Like Your Age

Consider breaking rules when it comes to how you invest your money. Imagine being sixty years old. Conventional thinking is you should be a more conservative investor and take less risk – you’re not forty anymore. Should you? And the opposite applies if you’re younger. This article emphasizes the need for tailored financial planning and investment strategies, and the need to bend some general rules to maintain good financial and mental health.

They say your risk tolerance should decrease over time – be a more aggressive investor when you’re younger and “throttle back” as you age. The Rule of 100 is a guideline on how you allocate between stocks (growth) and bonds (fixed income) over your lifetime. Subtract your age from 100 and the result is the recommended allocation to stocks, and the difference goes to bonds. Hence, a 40 year old would have sixty percent in stocks and forty percent in bonds, and a 60 year old would have the opposite allocation. Generally, it makes sense to take the foot off the gas investment-wise as you age. However, here are four reasons an investor might break the Rule of 100.

Higher returns needed to achieve your goals

Reducing the stock allocation generally lowers the volatility (risk) – and reduces the long-term return.  The expected annual returns for US stocks and investment grade bonds are about seven percent and three percent, respectively, per long-term capital market assumptions from Goldman Sachs and JP Morgan. The difference in expected returns for a 60/40 versus a 40/60 portfolio is a little under one percent. Some investors need the additional return.

Don’t outlive your retirement savings

Length of retirement and the aging process are important variables in financial planning. Investors tend to live longer than they expect and should have a cushion. A recent study by Morningstar called Estimating “The End” of Retirement recommends using life expectancies of age 90 or 95 for an average couple aged 65. Your money may need to last a long time.

Investments don’t neatly fit in the categories

Some stocks act more like income investments (high dividend paying stocks) and some bonds pattern more like stocks (high yield bonds). Real estate can act like both providing rental income and appreciation. Consider an investment’s characteristics and how it behaves, rather than its name, in your allocation strategy.

Are you the average investor?

Follow your financial plan. What if pension and Social Security will significantly cover your retirement lifestyle? You have the luxury to be more growth-oriented. What if you’re younger and inheriting significant wealth? You can be a more conservative investor – like starting a marathon at mile marker 15 or 20 – or take the opportunity to do amazing things. And what’s important about money to you? Some focus on security and not worry about running out of money in retirement. Others want the freedom to do what they want in retirement without having to ask. And others find it important to leave a legacy or pass on what was left to them.

Granted we face uncertainties such as COVID and US elections. Remember to stay focused on your main challenges – to worry less about your finances, not being a burden to anyone, making smart financial decisions, and even making this world a better place. Investing will be a lot easier. Secure your future wisely.

This article can also be viewed at the Reno Gazette Journal.

About Brian Loy

Brian Loy writes insightful and inspiring articles about the ever-changing world of personal finance and the global trends that affect the risk and return on investments and shape the financial- and retirement-planning process.
This entry was posted in Planning Tips and Goals. Bookmark the permalink.

Comments are closed.