The common advice tells us to “invest according to age” but this is not always right for you.
The idea is that at the age of 40, your investment portfolio should apparently be 40% bonds and 60% stocks, and at the age of 80, it should be 80% bonds and 20% stocks. The idea is that the bond portion of your portfolio should equal your age, as bonds are less volatile. As you get older, your time horizon shortens and you want more stability.
But this is not always smart.
Because everybody is different, with different financial circumstances, here are six questions to determine if you should invest according to age:
1) What does the rest of your financial world look like? If you are going to have a defined benefit pension plan and government pensions that cover most of your expenses each month – then your personal investment account should probably be much more aggressive, regardless of your age.
2) What are bond yields? Where are interest rates going? Currently, it is a poor point in the cycle with bonds offering very low yields and carrying interest rate risks, so even if you are 80 years old, you might not want to hold too much of your portfolio in bonds.
3) Who is actually going to use the money? We work with many older clients who will likely never use half their portfolio. We can be very conservative with the “needed” part of the portfolio, but why do so with the other funds? Those assets are earmarked for their kids. Even if you are 75, it is the children’s appropriate asset mix that should apply to that part of the portfolio.
4) How much risk do you need to take? If you are 55 and trying to “catch up” to your financial plan, it might be necessary to have a more aggressive growth strategy (weighted more towards stocks), but if you are already in a great financial position, you might not want to worry about the investment markets at all.
5) What if you don’t want to generate taxable investment income? What if owning GICs, government bonds and cash is the least tax-efficient investment for you? Even at an older age, you might then consider a heavier weighting towards stocks in your portfolio.
6) Are you likely going to be around at age 95 or does your health suggest that you may not make it past 65? Clearly, a 60 year old in great health should have a different portfolio than a 60 year old who is battling a terminal illness.
The key here is that your investment portfolio should be tailored to fit your personal needs, and not based on a “life cycle” investing strategy. Take a look at my Globe and Mail personal finance column, where this article first appeared.