Invest According To Your Age

Should you invest according to your age?

Some advisors recommend portfolio dollars be divided between stocks and bonds depending on the age of the investor. One popular rule is to take your age and invest that percentage of your portfolio into bonds, and invest the remaining portfolio dollars in stocks.

Photo by Alex E. Proimos, courtesy of flickr

So, with this rule a thirty-three year old investor would have 67 percent in stocks and 33 percent in bonds.

Why so? Well, age is often a factor in determining an investor’s risk tolerance. Risk tolerance will determine which assets a person is comfortable investing in.

The basic logic behind using the age formula is that older age usually translates to lower risk tolerance.

Younger investors have a longer investment horizon, so they have more time to invest and more time until they need the money. They are still in the earning phase of life, so they will continue to work and receive income for several years. The longer investment horizon can also allow their portfolios extra time to bounce back from rough stretches.

Older investors may be done with the earning phase and are looking to their investments to finance retirement. Some may be living on a limited or fixed income (income which may be provided by their investments). As such, they may not be able to handle the losses that often come with riskier securities and they do not have time to wait for the market’s recovery.

In addition to age, a new job, spouse, child or business venture are all changes which may affect the level of risk you are willing to take with your investments. You don’t have to change your portfolio every time you celebrate a birthday, but you should revisit your risk tolerance preferences as your life situation changes.