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The more time you have to invest, the more room you have to make mistakes, wait-out downturns, and to experience the power of compounding interest.
As you get older and need to draw income from investments, things change. The answer is relatively simple: you can afford to be very aggressive when you’re young, and gradually become more and more conservative with your investments as you grow older.
Generally speaking, stocks are considered risky investments, while bonds are considered less risky, so a person’s portfolio mix from age 40 to age 80 might go from 80 stocks/ 20 bonds to 50/50 or even 20 stock/ 80 bonds depending on his or her preferences and the market conditions.
One thing to consider is that as people age their ability to make complicated decisions with their investments can become impaired, and it may become necessary to invest up to 100% of their assets in bonds and fixed income, and to appoint a trustee or durable power of attorney to make decisions for them if need be.
If a potential investor has already entered retirement and will need to use the assets they have in the near future, it may not be suitable or in their best interest to invest in equities at all. Preferred stocks which pay dividends are usually considered debt instruments like bonds in these evaluations.
Time horizon is an important consideration because a look at returns over rolling periods of a few years will reveal that historically there have been plenty of shorter time periods that have experienced negative returns in the market, and no one can guarantee positive returns.
Over longer time periods, however, such as 20 years, the “market portfolio” (usually represented by the S&P 500) has always experienced positive returns. This is not guaranteed either, of course, but it is a much safer assumption to work with.
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What Does Diversification Mean?
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