Your age should play a major role in determining how you allocate your investment portfolio. However, there are other important non-age factors that also need to be considered in determining asset allocation. The basic philosophy about age and investment allocation is that younger investors can and should be more risky investors, and older investors should be cautious investors. Younger investors can afford to be more risky because they most likely don’t need the money right away. If something horrible was to happen to their investment portfolio, they are young enough to rebuild.

Older investors with a retirement portfolio should be much more cautious with their asset allocation. A large loss to their investment portfolio could really do damager to their retirement income. Bonds are a great somewhat safe place to put cash, but multiple bonds should be held to avoid default risk.

Please understand that everyone’s financial situation is different and what we mentioned above might not fit your particular situation.

Am I a younger or an older investor?

We can’t really answer that for you, but here are some clues to determine how risky or safe your asset allocation strategy should be.

When do you need the money you are investing? If you need your investing funds within 5 years you should be a safe investor. The closer you are to needing the money the more cautious you need to invest.

- Are you going to be buying a house soon with your investments?
- Are you retiring soon?

How well can you stomach a bad day in the stock market? How about a bad year in the stock market?

- If you are can sleep at night with Wall St. in a panic, then you can be a more risky investor. (As long as you don’t need your funds within the next five years
- If you are scared of a market crash, or you would be in financial trouble if the market crashed, you need to be a more cautious and safe investor.

This should give you a good idea of what kind of investor you are and how risky your investment portfolio should be. Age does play a big part in determining asset allocation, but financial needs and risk tolerance are also very important to consider.

Read some of our other posts about Asset Allocation and Diversification.

Tags:   Asset Allocation Model   Learn How to Invest  

Posted on September 5, 2007 7:12 AM | Digg | del.icio.us