Lux Investing
What different investment strategy would a 22yr old use versus a 65yr old?
I'm guessing a young person would have longer to invest, so they would want mainly equities which have a higher rate of return over-time than fixed-income assets. What would a soon-to-be retiree want to invest in? Please help me expand on these ideas. Thanks!
Public Comments
- A 22 year old would probably want to invest aggressively. So, small caps, mid caps, etfs, maybe checkout a few ipos that sound interesting. An older person would probably have started off aggressive but slowed down to stocks in large companies that have good books. Also large cap mutual funds. Things where its safe. If you're 22, go aggressive. You can get between 9-13 percent. Thats an estimate. It could be higher, much higher. But it could also be lower. 9-12 percent is a safe bet.
- They may do the opposite of what they should do. I am almost 60 and 100% equities but some young people are afraid to lose anything. Just because someone is 65 doesn't mean they are on their deathbed. My grandma died at 98 and retired at 57 so 41 years she shouldn't have gone short term until near the last 5-10 years. But she refused in invest and kept her money in the bank where it didn't beat inflation.
- typically when you are younger you should find ways to reasonably maximize earnings - focus on stocks and other higher risk investment. when you are close to retiring you will want to find ways to preserve your assets (cd's, tax-free municipal bonds)
- There is not "one size fits all" answer to this question b/c the investing goals and parameters will differ widely between any pairing of 22 / 65 yr. old investors. What matters are the investment goals. But for the sake of discussion, let's assume that the average 22 yr. old wants to create a retirement fund, operating on the reasonable assumption that social security won't exist when he's around! Although he can afford to expose himself to risk in the market (because he has a longer horizon from which to recover from a financial reversal) he doesn't need to take the risk because he has the time value of his investments working for him. A 22 yr. old can retire wealthy by developing a disciplined approach to investing every month. For example, by starting with $5,000 in a mutual fund, making a mere $250 deposit every month and continuing that for 43 years until retirement age, he will have accumulated over $900,000 by simply distributing his investments over a basket of ETFs that simply match the market average of 7% per years. Simple. Very little time and very little risk involved. And he retires fat and happy. That's only once scenario for the 22 yr. old. Suppose that his goal is to retire filthy stinking rich. He starts out with the same $5,000 and still sticks $250 per month into the kitty. But now he manages actively, touching it every day and making an average of 10 to 20 trades per month. He can make 15% per year but it will expose him to a higher level of risk (manageable in my opinion) and require more time, probably 8 to 10 hours per week. But he will end up with something on the order of $15million when he retires. There are as many scenarios as there are 22 yr. old investors. The 65 yr. old investor is another case. Is he investing because he needs the income? Or is he doing it as a hobby? If he's a hobbyist then there are any of a million different scenarios he might follow - puts and calls, derivatives, technical analysis and on and on and on. But if he's managing his investments because he needs the income, then he's in a bit of a precarious positoin. He doesn't have the same time horizon as the 22 yr. old. A financial reversal at age 65 could be devastating, and if he's investing for income it means he doesn't have a lot of other resources available. This guy will be buying stocks that have a long and consistent dividend yield, balanced by some AAA bonds (are there any out there right now)? Or if he has a large chunk of cash he may want to use it to buy an annuity. He has options, but because he doesn't have the time value of his money available, his options are more limited. So in answer toyour original question, the answer MIGHT be counterintuitive. While you might think a 22 yr. old would WANT to accept greater risk, he doesn't have to because he has the time value of his money working for him. The 65 yr. old MIGHT HAVE TO because he doesn't have adequate income in other ways, so he'll have to learn to live with a higher degree of risk to generate the income he needs!
