Do Younger Investors Have Time To Recover From Investing Mistakes?
It is commonly said that younger investors can afford to make riskier investments, as they have more years in which to recover from losses. Is this true?
Suppose a younger investor invested in a company called Boo.com in autumn 1999. Less than one year later, in May 2000, the company entered bankruptcy and was liquidated. The investor lost 100% of his investment, but he was only a year older; perhaps he had plenty of time to recover from his loss.
Some losses take longer to manifest. Suppose a younger investor bought stock in Lycos. In 2000 Telefonica bought Lycos for $12.5 billion. In 2004 Telefonica sold Lycos for $95.4 million. The younger investor would have lost more than 99% of his investment, and it would have taken 4 years, not one; perhaps he had plenty of time to recover from his loss.
Some losses take decades to manifest. Suppose a younger investor bought stock in the Boston Globe, a more conservative investment than either Boo.com or Lycos. In 1993 the New York Times bought the Boston Globe for $1.1 billion. In 2013 the New York Times sold the Boston Globe for $70 million. The younger investor would have lost more than 93% of his investment, and it would have taken 20 years, not one; perhaps he had plenty of time to recover from his loss.
A loss is not just about time, it's also about emotion. Loss aversion says that "losses are twice as powerful, psychologically, as gains". Or, as Indiana Jones said in "Raiders of the Lost Ark": "It's not the years, honey, it's the mileage".
Suppose you are 25 years old, you make a significant investment, and 5 years later you realize a significant loss. Now you are 30 years old, and not only do you not have more than you started with, you have less than you started with. You are 5 years closer to retirement, but you are worse off than you were 5 years ago. You will probably put more pressure on yourself, and you will be tempted to choose riskier investments that appear to offer higher gains or higher yields. The bad news is, riskier investments stand a higher chance of failure, or they wouldn't be riskier. How many such cycles can one person stand before they give up and say, "I guess I'll just live off my Social Security"?
I disagree that younger investors have time to recover from investing mistakes.
I disagree that younger investors can "afford" to make riskier investments.
I believe that younger investors should invest conservatively until they can be sure that they have enough to retire on; then, and not before then, can they afford to make riskier investments, and not have their retirement jeopardized if the investments realize a significant loss.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.