A:

Investors must decide for themselves what the term "risky investment" means to them. At age 25, you may feel comfortable dabbling in investments that have the potential to earn returns between +50% and -30% in one year's time. However, by about age 60, your comfort level may shift to a more practical level of +12% to -8% over a year's time.

When people are gainfully employed, they have the earning power to make up investment losses that their portfolio may suffer due to poor market performance or bad judgment calls. As workers approach the five-year retirement mark, they tend to scale back asset allocation to more conservative positions to keep pace with their diminished earning power. Such measures could prevent investment losses, which have the potential to disrupt portfolio growth and delay retirement.

During the golden years of retirement, many seniors live on fixed incomes derived from social security benefits or pensions. Because of reduced earning capacity, most seniors cannot afford to suffer devastating losses from risky investments. Simply put, they have no way to replace lost funds. Asset allocation explains more than 90% of volatility on overall portfolio returns and, therefore, should be considered carefully.

When we think of "risky" investments, equities, or stocks, come to mind. When we think of "conservative" investments, fixed income products such as bonds, CDs and money market accounts are referenced. For investors in their 20s and 30s, a common asset allocation might be comprised of 80% equities and 20% fixed income. As investors approach or enter retirement, it is more common to see the allocation shift to more conservative levels of 60% equities and 40% fixed income - or maybe even 50/50.

(For more on this topic, read Weave Your Own Retirement Safety Net, Achieving Optimal Asset Allocation and Asset Allocation Strategies.)

This question was answered by Steven Merkel.

RELATED FAQS

  1. What does Value at Risk (VaR) have to do with maximization of shareholder wealth?

    Learn about the value at risk statistical measure and how examining the VaR for their investments can help investors maximize ...
  2. How can I calculate the tracking error of an ETF or indexed mutual fund?

    Understand what tracking error is and learn about the significant difference it can represent for investors who favor index ...
  3. What are the financial benefits of retiring in the Philippines?

    Read about the many financial benefits of retiring in the Philippines as an American expatriate, including low health costs ...
  4. Besides stocks, what other asset classes can I invest in through ETFs?

    Discover the extremely far-reaching range of investment asset classes that are available to investors through exchange-traded ...
RELATED TERMS
  1. Current Service Benefit

    The amount of pension benefit accrued by an employee who had ...
  2. Sharpe Ratio

    A ratio developed by Nobel laureate William F. Sharpe to measure ...
  3. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  4. Smart Beta

    Smart beta defines a set of investment strategies that emphasize ...
  5. Senior Move Manager

    Senior move managers (SMMs) help seniors downsize and relocate ...
  6. Medigap

    Also called Medicare Supplement Insurance, Medigap is health ...

You May Also Like

Related Articles
  1. Mutual Funds & ETFs

    Safest Industries To Invest In

  2. Mutual Funds & ETFs

    Top 4 ETFs That Will Help Diversify ...

  3. Entrepreneurship

    Why Small Business Owners Need Financial ...

  4. Mutual Funds & ETFs

    Top Commodities ETFs for Your Retirement ...

  5. Savings

    Investing: How to Make Fast Money in ...

Trading Center