Is Your Investment Style Age-Appropriate?

For those of you who follow such things, a recent make-up trend was “artfully sloppy”. Mascara applied with a heavy hand, caked lashes casting nocturnal shadows under the eyes like Andy Warhol’s muse Edie Sedgewick, lipstick smeared outside the lines á la Courtney Love. And hair, greasy-looking and tangled, like too many days between shampoos and an interlude with a comb.

These types of devil-may-care beauty trends should come with a caveat: Don’t try this if you can name all three Gabor sisters. In other words, if you’re a woman of a certain age, unless you want to look like her pharmacist cut off her Valium refills, stick to good classic grooming: a light but thorough maquillage and decent hair.

Same goes for investment portfolios. The stuff you can get away with in your 20s—crazy penny stocks, hot tips, and shares in companies with no earning yet priced for perfection, doesn’t look so cute by the time you’re in your 50s and beyond, and looking at fewer high-paying earning years ahead that can patch up investment boo-boos.

An all-equity portfolio—the financial equivalent of clumpy lashes— is not only potentially thrilling but also makes good fiscal sense for younger investors with time horizons over 20 years. They can afford the volatility that goes with equities. A market meltdown here, an oversold situation there, are no biggies because, in the distant future when the positions are wound down, good money will likely have been made.

Compare that to someone who is on the cusp of retirement. An all-equity portfolio is still full of chills and thrills but it’s too volatile. Unless the person has another, rock-solid form of income such as a defined benefit plan or a very rich and generous benefactor, there may not be enough time to recover from a market crash before the funds are needed. The portfolio will continue to shrink at an above-average rate to provide income. More chills, fewer thrills.

Time diversification is the concept that, given a long enough time horizon, even inherently risky assets like equities mellow out and give above-average returns compared to bonds and cash. With yields and interest rates at historical lows, more investors are being driven to participate in the equity markets in order to generate reasonable returns. This behavior even has a cute acronym: TINA. (There is no alternative.)

Yet, sometimes without realizing it, they’re taking on more risk than they should because their investment style is younger than they are. Just because equities get the lion’s share of media buzz doesn’t mean they’re right for you.

One of the boons of being older is knowing which trends to pick up and which to drop. It would be wise to remember Oscar Wilde’s words: “When I was young I thought that money was the most important thing in life; now that I’m old, I know that it is.” 

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