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Should I be investing more aggressively at this time?

I have a frozen 401(k) with $108K from a former employer that was consumed by a bigger entity. I now have a 403(b). I am 50 years old with the goal to retire at 68. I am currently in a moderately aggressive plan. Would it be wise to increase to a more aggressive plan given my age and the current state of the economy? I see the returns of late being better and wonder if even for a short time, it might be of benefit?

Financial Planning, Investing
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July 2017

On the surface, an aggressive plan might seem like a good idea. But in fact, it’s a trap I’ve seen many investors fall into.

From my perspective, there are three problems with this approach.

The first is that markets are notoriously unpredictable.

In fact, they almost always do what we least expect. A good example is the recent Trump election and surprising stock market rally. Who expected that? While it is true that the markets have been doing well, we cannot be sure how long this trend will continue. But what we do know with absolute certainty is that if you increase the risk in your portfolio, you will experience more volatility. You will also experience greater declines when the next downturn comes. And it will come. But investors who are inclined to take more risk when times are good often believe they can avoid market declines. They believe they can ratchet the risk back down before things get too bad. Although this is a compelling idea, it is far more difficult to accomplish than you might expect. Most investors who travel this path wind up doing more damage than good.

The second problem we encounter is that markets are far more volatile than most people realize.

In fact, on average the S&P 500 is down 14% at some point every year. I know it sounds impossible but it is true. If the market is down that much at some point every year, it’s not reasonable to expect that you can increase your risk while the markets are doing well and get more conservative before things go down. Don’t get me wrong, some people will attempt this and they will succeed on occasion. But in my experience, this is no better than gambling and will inevitably yield the same unpleasant results.

The third problem in tying your investment allocation to market conditions is that market conditions are always changing.

If your philosophy is to be more aggressive when the market is doing well, what do you do when you are surprised by a significant market decline? Do you hold? Even if the market continues to decline? If so, for how long?

As you can see, trying to play catch up with your investment portfolio is likely to do you more harm than good.

June 2017
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June 2017