Wednesday, April 9, 2014

Considering your age

When you’re younger and have more years until you plan to use your money,
you should keep larger amounts of your long-term investment money in
growth (ownership) vehicles, such as stocks, real estate, and small business.
As I discuss in Chapter 2, the attraction of these types of investments is the
potential to really grow your money. The risk: The value of your portfolio can
fall from time to time.
The younger you are, the more time your investments have to recover from
a bad fall. In this respect, investments are a bit like people. If a 30-year-old
and an 80-year-old both fall on a concrete sidewalk, odds are higher that the
younger person will fully recover and the older person may not. Such falls
sometimes disable older people.
A long-held guiding principle says to subtract your age from 110 and invest the
resulting number as a percentage of money to place in growth (ownership)
investments. So if you’re 35 years old:
110 – 35 = 75 percent of your investment money can be in growth
investments.
If you want to be more aggressive, subtract your age from 120:
120 – 35 = 85 percent of your investment money can be in growth
investments.
Note that even retired people should still have a healthy chunk of their
investment dollars in growth vehicles like stocks. A 70-year-old person may
want to totally avoid risk, but doing so is generally a mistake. Such a person
can live another two or three decades. If you live longer than anticipated, you
can run out of money if it doesn’t continue to grow.
These tips are only general guidelines and apply to money that you invest for
the long term (ideally for ten years or more). For money that you need to use
in the shorter term, such as within the next several years, more-aggressive
growth investments aren’t appropriate. See Chapters 7 and 8 for short-term
investment ideas.

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