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. Am I losing the right to collect spousal Social Security benefits before I collect ...

    The short answer is yes, if you haven't reached age 62 by December 31, 2015. The Bipartisan Budget Act of 2015 disrupted ... Read Full Answer >>
  2. What is the maximum I can receive from my Social Security retirement benefit?

    The maximum monthly Social Security benefit payment for a person retiring in 2016 at full retirement age is $2,639. However, ... Read Full Answer >>
  3. Are target-date retirement funds good investments?

    The main benefit of target-date retirement funds is convenience. If you really don't want to bother with your retirement ... Read Full Answer >>
  4. What's the difference between Social Security Disability Insurance (SSDI) and Supplemental ...

    Disabled persons can receive payments through two programs: Social Security Disability Insurance and Supplemental Security ... Read Full Answer >>
  5. Where else can I save for retirement after I max out my Roth IRA?

    With uncertainty about the sustainability of Social Security benefits for future retirees, a lot of responsibility for saving ... Read Full Answer >>
  6. Will quitting your job hurt your 401(k)?

    Quitting a job doesn't have to impact a 401(k) balance negatively. In fact, it may actually help in the long run. When leaving ... Read Full Answer >>
Related Articles
  1. Investing

    3 Healthy Financial Habits for 2016

    ”Winning” investors don't just set it and forget it. They consistently take steps to adapt their investment plan in the face of changing markets.
  2. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  3. Retirement

    Early Out: A Realistic Plan to Retire Younger

    If you want to retire ahead of schedule, it'll take some extra planning.
  4. Mutual Funds & ETFs

    Which Fund Share Class is Best for Retirement?

    Mutual funds are a popular investment for retirement. Here's how to choose the best share class when investing in them.
  5. Retirement

    6 Robo-Advisors That Require Little to Start

    There are many well-regarded robo-advisor options that come with minimum investment amounts. Here are snapshots of a handful of them.
  6. Sectors

    2016's Most Promising Asset Classes

    Find out which asset classes are considered to be the most promising for generating portfolio returns and reducing volatility in 2016.
  7. Retirement

    Smart Ways to Tap Your Retirement Portfolio

    A rundown of strategies, from what to liquidate first to how much to withdraw, along with their tax consquences.
  8. Saving and Spending

    Social Security: Navigating it with Your Clients

    Many people don’t realize how confusing Social Security can be until they're face to face with taking it. Here's how to talk to clients about it.
  9. Mutual Funds & ETFs

    Pimco’s Top Funds for Retirement Income

    Once you're living off the money you've saved for retirement, is it invested in the right assets? Here are some from PIMCO that may be good options.
  10. Your Clients

    How to Construct an Annual Review for Clients

    One of the best things that advisors can provide to clients is an annual review of their financial situation. Here are some guidelines.
RELATED TERMS
  1. Sortino Ratio

    A modification of the Sharpe ratio that differentiates harmful ...
  2. Sequence Risk

    The risk of receiving lower or negative returns early in a period ...
  3. Reverse Mortgage Net Principal Limit

    The amount of money a reverse mortgage borrower can receive from ...
  4. Modified Term Payment Plan

    A way to receive reverse mortgage proceeds where borrowers get ...
  5. Nursing Home Resident Trust Fund

    An account in a nursing home that helps residents manage finances ...
  6. Equity Risk Premium

    The excess return that investing in the stock market provides ...
Trading Center