Simple advice can create a lot of problems that are not so simple to fix. One of the worst examples is the advice that age should play a central role in investment allocations. Not only is much of this "advice" outdated, it is far too generic to be useful to most investors. Follow this advice and you may just find yourself running short of money late in life. (For related reading, take a look at Retirement: Which Generations Are The Best Savers?)

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Today's 65 Isn't Yesterday's 65
A lot of investment advice is predicated on what might be called a life-cycle theory of investing. The idea here is that people go through predictable stages of their financial lives, accumulating more assets than savings in the early years, saving more in the high-earning years of middle age, and then dissaving throughout retirement.

Things have changed, though. Long careers at a single employer are less common, and people are also living longer than ever before. Making it to age 80 is not all that uncommon now, even though much of the retirement advice out there is predicated on old data. What this all boils down to is this - today's 65 isn't like yesterday's 65 and most workers are significantly UNDER-saving for what it is likely to be their real lifespan.

Your Number Isn't Your Number
One of the more dangerous ideas out there is that a person's age should correlate to the percentage of their portfolio that should be in bonds. In other words, a 30-year old should have a 30% allocation to bonds, while a 65-year old should be 65% allocated to bonds. In actual practice, this advice is only solid at the absolute extremes - a newborn should indeed have a zero allocation to bonds, and a centenarian probably should have a 100% allocation to bonds.

While this "allocate your age to bonds" advice is really easy and does indeed account for the idea that investment allocates should change with time, it's just not good advice. The real return of bonds (that is, the return after inflation) has been only about 1-2% over the long term. That is just too little appreciation for a worker in their twenties, thirties or forties. Although there may be certain circumstances when an allocation to bonds make sense (saving for a large purchase, exploiting a pricing anomaly, etc.), most younger workers should keep their allocation to bonds much lower than their age.

Perhaps surprisingly, this advice does not change all that much as a worker/investor ages. Even at the beginning of retirement (the mid-sixties), a two-thirds allocation to bonds is simply too high in most cases. Investors who've socked away millions of dollars may find that bonds are perfectly adequate for preserving wealth, but most retirees will need to see ongoing growth in their portfolio to continue to provide for their spending needs in retirement. At a minimum, investors should hope to keep pace with inflation and with real returns of 1-2% in bonds and 4-6% in stocks - it is clear that stocks can play a key role quite late into life.

Stocks Aren't as Risky as Experts Say
Readers who are a bit skeptical about stocks should also realize that the risks that go with equity investments may not be quite what they think. It is true that putting all of your money into a single stock is very risky, as is owning a portfolio of four or five biotech or software stocks. But a diversified portfolio, particularly one that includes mutual funds, offers a much different picture.

Multi-year losses in the stock markets are rare, and that is a powerful advantage for investors. If a reader looks at the long-term average returns and standardized deviations of major equity funds like T. Rowe Price Mid-Cap Growth, Dodge & Cox Stock or Fidelity Contrafund, an interesting stat appears - over five years there is only about a 16% risk that an investor will see more than low-single digit losses and over ten years, there is less than a 16% probability of losing any money at all. In both cases, the odds are significantly better than 50/50 that the investor will make money.

Said differently, as long as an investor holds a diversified portfolio and invests for the long-term, the odds of losing money is actually quite low and the odds of achieving positive real returns are good.

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What's The Real Risk?
As much as the givers of investment advice focus on risk of loss, that is not the only risk that matters. A worker could dutifully save a little bit from every paycheck for 40 years and invest that money very conservatively, never seeing a down year in the portfolio. And yet, that same person could find themselves 10 or 15 years into retirement with no money and total dependence on Social Security. That sounds like a pretty negative outcome, even though this investor completely avoided "risk" as it is commonly described.

The risk of failing to accumulate enough assets to last through retirement is every bit as much a real risk and a real problem. Unfortunately, it's a risk that largely leaves investors on their own to find protection. Investment managers and advisors know they will likely be fired if they have too many down years (or the losses in any year are too high), so there is every incentive to be too conservative - selling investors on the notion of "diversification" and "conservative wealth-building" will keep the fees and commissions rolling in for years, even if the investor is underperforming their actual needs and will likely run out of money in retirement.

The Bottom Line
What's an investor to do? For starters, be very suspicious of any simple rules-of-the-thumb about how much to save or how to allocate and invest those savings. Beyond that, think seriously about what your actual retirement needs are going to look like and how you will meet those needs - whether it is by lowering your spending expectations in retirement, saving more today, or targeting higher returns, or some combination of the three. At the same time, take a step back and rethink your feelings about risk - you might find that the risk of running out of money tomorrow is even scarier than losing money today, and that the long-term benefits of diversified stock investing outweigh the risks. (For additional reading, also see 6 Ways To Ruin Your Retirement.)

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