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. Why is my 401(k) not FDIC-Insured?

    401(k) plans are not FDIC-insured because they are typically composed of investments rather than deposits. The Federal Deposit ... Read Full Answer >>
  2. Are stocks real assets?

    Stocks are financial assets, not real assets. Financial assets are paper assets that can be easily converted to cash. Real ... Read Full Answer >>
  3. Are spousal Social Security benefits taxable?

    Your spousal Social Security benefits may be taxable, depending on your total household income for the year. About one-third ... Read Full Answer >>
  4. What are the best ways to sell an annuity?

    The best ways to sell an annuity are to locate buyers from insurance agents or companies that specialize in connecting buyers ... Read Full Answer >>
  5. Are spousal Social Security benefits retroactive?

    Spousal Social Security benefits are retroactive. These benefits are quite complicated, and anyone in this type of situation ... Read Full Answer >>
  6. Is the Social Security administration part of the executive branch?

    The U.S. Social Security Administration, or SSA, is an independent government agency under the purview of the executive branch. ... Read Full Answer >>
Related Articles
  1. Credit & Loans

    5 Signs a Reverse Mortgage Is a Bad Idea

    Here are the key situations when you should probably pass on this type of home loan.
  2. Mutual Funds & ETFs

    Top 3 Switzerland ETFs

    Explore detailed analysis and information of the top three Swiss exchange-traded funds that offer exposure to the Swiss equities market.
  3. Retirement

    Retirement Planning for Entrepreneurs and Small Businesses

    If your business has receiveables, here's a smart way to leverage them to build up your retirement fund fast.
  4. Retirement

    Overhaul Social Security to Fix Retirement Shortfall

    There are several theories and ideas about how we can make up for the $6.6 trillion retirement savings shortfall in America. Adjustments to Social Security and our retirement savings plans are ...
  5. Mutual Funds & ETFs

    Top 5 Chinese Mutual Funds

    Learn about some of the most popular and best performing mutual funds that offer investors exposure to the important emerging market economy of China.
  6. Investing News

    How Does US Social Security Measure Up Abroad?

    Social Security is a hotly debated topic. After examining the retirement plans of three different countries, the U.S.'s does not come out the winner.
  7. Investing Basics

    Explaining Unrealized Gain

    An unrealized gain occurs when the current price of a security exceeds the price an investor paid for the security.
  8. Investing Basics

    Explaining Risk-Adjusted Return

    Risk-adjusted return is a measurement of risk for an investment or portfolio.
  9. Investing

    Five Things to Consider Now for Your 401(k)

    If you can’t stand still, when it comes to checking your 401 (k) balance, focus on these 5 steps to help channel your worries in a more productive manner.
  10. Investing Basics

    Explaining Financial Assets

    A financial asset is intangible property that represents a claim on ownership of an entity or contractual rights to future payments.
RELATED TERMS
  1. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  2. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth ...
  3. Return On Investment - ROI

    A performance measure used to evaluate the efficiency of an investment ...
  4. Dynamic Updating

    A method of determining how much to withdraw from retirement ...
  5. Possibility Of Failure (POF) Rates

    The likelihood that a retiree will run out of money prematurely ...
  6. Safe Withdrawal Rate (SWR) Method

    A method to determine how much retirees can withdraw from their ...

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!