Can you afford to take a big market loss? Well, that depends. If you're retired and living on a fixed income, betting your portfolio on highly volatile stocks can be hazardous to your wealth - unless you have a few years' worth of liquid investments available (as indeed you should).
It is usually assumed that, in contrast to the above, young people can afford to take a lot of risk with their portfolios. In theory, that probably is true, but not always. In an article that Research Affiliates' Rob Arnott and Lillian Wu published two years ago, they noted a surprising - nay, shocking - finding from a Fidelity survey of 12.5 million retirement plan participants showing that a whopping 41% of investors between the ages of 20 and 39 cash out some or all of their assets when switching jobs.
Thus, the conventional wisdom that young people should be invested 100% in equities seems quite right in theory, though in practice it can be quite harmful. That is because these younger investors end up raiding their retirement savings to meet their basic living expenses, selling low, and paying the IRS a penalty for the privilege.
I like the theory that young investors invest heavily in equities. And I strongly advocate that investors build a cash reserve as part of their financial plan to handle emergencies so they need not raid their retirement savings. But a plan must be customized to the circumstances, and it could be that a young investor must prepare himself through various preliminary activities such as debt elimination and reserve build-up before graduating to an all-equity investment portfolio.
I thought of this real-world problem when reading Jeff Miller's recommended New Year's resolutions on today's SA. He rightly noted that his most important piece of advice was this:
Evaluate the risk of your portfolio and make sure it is appropriate to your plans and circumstances."
Many - advisors in particular - note the importance of tailoring a plan to an investor's unique circumstances. That's not just rhetoric; it's reality.
Please share your thoughts in our comments section. And, herewith, links from today's SA:
- Jack Waymire: Financial advisors need new ways to differentiate themselves.
- BlackRock offers a modest proposal for a doable new year's resolution to build your wealth.
- Douglas Tengdin on structural impediments to reflation.
- Danielle DiMartino Booth on the art of trade warfare.
- For more content geared to FAs, click here.