I don’t understand this argument fully. I always read, “Since you have time on your side, invest in high-risk, high-reward.” But why?
Personally, I like beating inflation. That’s good enough for me. I’ll admit, I’m conservative…maybe even extra conservative. Keeping up with indexes? Not that much of a priority. I don’t understand why younger folks should invest in aggressive funds? Just because you have time on your side, does not mean risking it all away is the wisest move. You can make all the arguments of not making 10% returns or whatever, but personally I’m happy knowing my money is growing. Life is not a sprint…it’s a marathon.
Look, I’m not advocating a 20 year old move all their funds to a money market account, however, I am advocating taking your shots, planning them wisely, knowing your goal, and doing what you feel comfortable doing. Nevermind all the buzz about taking risks because you’re young. I don’t mean disregard it, because it’s good info. But think about it first. What is your goal? Is it to be a billionaire? Then yes, by all means be aggressive. But if your goal is to lively comfortably without too much worry about finances while living within your means, then is aggressive that necessary?
Personally, I can’t come to invest aggressively all the time. Sure, on occassion, I will make some moves, but when I feel comfortable. Past performance is not an indicator of future performance. What happens if I invest aggressively, and I just so happen to pick a 30 year period where the average is 2%? Or worse, it’s negative. By the time I’m 40 years old, that’s almost 10 years of lost time, that my wealthy could have been accumulating gradually but surely.
Sure past performance is a great indicator, but it’s impossible to know what’s down the road. I don’t need to be living in 5000 sq foot mansion when I retire, just a nice home. I don’t need to fly my own private jet to the Bahamas, just an occassional trip to Vegas. If I’m not looking to strike it rich and become the next billionaire, why do I need to be aggressive? Can you promise me the economy will continue to grow like it has in the past? If not, I might as well put my money on the banker…
You make an excellent point. Tolerance of risk is a key component to any investment decision, and your argument is perfectly valid. I just want to make a comment regarding your second last paragraph: in order for the economy to prosper in the long run, investors must be able to achieve a higher rate of return over the long run by investing in equities rather than saving in banks. If you happened to pick the 30 year period where “average is 2%” on rather safe equities (blue chip stock, index fund or ETF), then we all have more problems on our hands than terrible returns.
Alvanson, I guess so…if 2% was the average for the next 30years that’d be really bad. I am also a pessimist…
Sorry for the rambling…this was kind of a rant…just because all the recommendations always say to be aggressive while you’re young.
freedumb, I understand. I’m in no way suggesting that you should run out to invest aggressively (and obviously there’s no way you would receive that idea either). But you’re right: the whole idea of personal finance is that it is personal. You customize your finances to your goals and to what is comfortable for you! Some financial advisors and pf bloggers lose sight of this fact. Excellent article!
Yup.
If you’re taking any risk, you should expect atleast a 3 fold reward.
For example, if you invest $4k in a speculative stock and decide to bail if it drops 25%, your at risk capital is $1k. So you should expect a return of $3k to justify the risk.
If you risking $1k and your upside is $2k its not worth it!
Alvanson, oh, I didn’t take your comment that way…I was apologizing because my original post was like a collection of thoughts rather than a well articulated article…I agree 100% about the p in PF.
Empty Spaces, makes sense…but how much time do you give your investments to make it to 3x? The main gripe I have against all the advice about being aggressive is that the main premise is time. We have lots of time. But if the first ten years don’t work out, that’s lost time. Then suddenly the recommendation is to shift our investments to more moderate allocations? Then what happens if we wait 20 years for our aggressive funds to return?
Consider the following evidence…My 401k program has 3 tiers titled, “Conservative,” “Moderate,” and “Aggressive.” It has fund performance for the past 5 years.
Fund - 1 year 3 years 5 years
Conservative - 7.4% 11.3% 7.8%
Moderate - 7.9% 12.2% 7.1%
Aggressive - 9.1% 14.0% 6.9%
In the end, the conservative fund is up higher than moderate and aggressive funds. Is it worth it to be aggressive? I dunno…
Conservative, Moderate, Aggressive–those don’t really mean anything. They’re just in 401k’s for people who don’t know anything. By aggressive do you mean stocks versus bonds? Do you mean small cap versus large cap? You didn’t lay out any specifics by which to measure what you mean by aggressive and conservative.
Jay, I was being lazy…damn it.
Conservative:
The fund does not buy securities directly; instead, it invests in six Savings
Plan Funds: the Stable Value Fund, the Inflation Protected Bond Fund, the
Total Bond Market Fund, the Real Estate Investment Trust Index Fund, the
Total Stock Market Index Fund, and the Total International Stock Market
Index Fund. This gives the fund exposure to a broadly diversified group of
U.S. and foreign stocks and various types of bonds. The fund’s target asset
allocation between stocks and bonds is 50% stocks, 50% bonds. The current
target allocation is 20% Stable Value Fund, 25% Inflation Protected Bond
Fund, 5% Total Bond Market Fund, 10% Real Estate Investment Trust Index
Fund, 30% Total Stock Market Index Fund, and 10% Total International
Stock Market Index Fund. State Street Global Advisors rebalances the fund
every month to the target allocations. For detailed information on the
underlying funds that comprise the Conservative Life Strategy Fund, please read the corresponding fund fliers.
Moderate:
The fund does not buy securities directly; instead, it invests in six Saving
Plan Funds: the Stable Value Fund, the Inflation Protected Bond Fund, the
Total Bond Market Fund, the Real Estate Investment Trust Index Fund, the
Total Stock Market Index Fund, and the Total International Stock Market
Index Fund. This gives the fund exposure to a broadly diversified group
of U.S. and foreign stocks and various types of bonds. The fund’s target
asset allocation between stocks and bonds is 65% stocks, 35% bonds.
The current target allocation is 10% Stable Value Fund, 15% Inflation
Protected Bond Fund, 10% Total Bond Market Fund, 5% Real Estate
Investment Trust Index Fund, 45% Total Stock Market Index Fund, and
15% Total International Stock Market Index Fund. State Street Global
Advisors rebalances the fund every month to the target allocations. For
detailed information on the underlying funds that comprise the Moderate
Life Strategy Fund, please read the corresponding fund fliers.
Aggressive:
The fund does not buy securities directly; instead, it invests in four Savings
Plan Funds: the Total Bond Market Fund, the Real Estate Investment Trust
Index Fund, the Total Stock Market Index Fund, and the Total International
Stock Market Index Fund. This gives the fund exposure to a broadly
diversified group of U.S. and foreign stocks and various types of bonds.
The fund’s target asset allocation between stocks and bonds is 85% stocks,
15% bonds. The current target allocation is 15% Total Bond Market Fund,
5% Real Estate Investment Trust Index Fund, 60% Total Stock Market Index
Fund, and 20% Total International Stock Market Index Fund. State Street
Global Advisors rebalances the fund every month to the target allocations.
For detailed information on the underlying funds that comprise the
Aggressive Life Strategy Fund, please read the corresponding fund fliers.
Not going to post the entire flier…
Weekly Roundup - 08/11/06…
Here’s a quick look at some of things that caught my eye over the past week…
JLP wants to know how much you spend on your household bills.
FMF has some tips for improving your home’s value with a steam cleaner.
But MBH disagreesR…
[...] Just Because You’re Young, You Have To Be Aggressive? [...]