Age Appropriate Investing Is the Key

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The most important rule of investing in the stock market is that your holdings should be reflective of your age and your tolerance for risk.

Your age and tolerance for risk should march together, however, many investors are still aggressive in their stock picks late into life when they should be shifting their focus to capital preservation.

Your greatest asset is the ability to earn an income. When investors are in their 20’s or 30’s, they can count on this ability to fill and re-fill if necessary, their retirement fund.

Unfortunately, some investors in their late 50’s and early 60’s still invest as if they had another 40+ years of earning power.

While some people are working later into life beyond the traditional retirement age of 65 (often because they have to), realistically there are only a limited number of years left to continue a life-long career.

Unless you want to be greeting people at the door of discount centers in your 70’s, you need to plan on winding down your career (and reducing or eliminating your ability to earn money). After all, a comfortable, work-free retirement is a goal many share.

Investors in the stock market nearing retirement should follow a plan to adjust their asset allocation from stocks to fixed income assets (bank CDs, high-quality bonds and so on).

The rule of thumb is to take your age and subtract it from 100. The remainder is what percentage of you assets in stocks, however this may still be too aggressive for some investors.

A more conservative formula suggests taking your age and subtract it from 80 and the remainder is how much you should have in stocks.

An even more conservative approach advocated by some investment professionals argues no stock for your retirement portfolio after age 60.

You need to decide the asset allocation that is best for you.

In its simplest form asset allocation says you should spread your investments across multiple products and multiple industries.

Asset allocation has many nuances such as what percentage of growth stocks should I own relative to holdings of safe bonds.

The simplest way to think of this is to consider your asset allocation as a speedometer on your road to investing success.

Like the speedometer on a car asset allocation can tell you how fast your holdings could potentially grow. It can also tell you when you are out of control and in severe danger of crashing.

Of the major asset classes: stocks, bonds and cash, stocks are generally considered the most risky. So the more heavily invested in stocks the faster your asset allocation odometer says you’re going.

If you are a young investor you should be heavily invested in stocks since over time they offer the greatest return of the other two asset classes. Because you’re young, if you swerve off the road and hit a tree, you’ll still have plenty of time to get back on the road repair your portfolio and continue moving forward.

The closer you get to retirement the slower you need to drive, which means reducing the of number of stocks in your portfolio to reduce the risk that you might swerve off the road and hit a tree.

If you are near the age of retirement and lose half of your retirement fund because the market decides to do a belly flop, you’re going to be in a tough spot. It certainly means you will probably be working past the age you plan on retiring if possible.

It may be hard to listen to your neighbor when he talks about the killing he made in the new tech stock, but if you’re nearing retirement that is not a safe place to go.

It is difficult for many investors in the stock market to think about getting out of the game and watching from the sidelines. If you have worked hard and been clever enough to take profits when you could, you may have enough set aside so a small percentage of your portfolio can be used to take a chance on the occasional risky investment.

However, if your solution to losing half of your retirement nest egg is to double down on stocks so you can earn all of the lost income back, you have just made a tragic and fatal mistake.

Investing in stocks is inherently risky and, even if you have to tolerance for risk, a bad choice as your major investment going into retirement.