Age And Asset Allocation

Great article about age and asset allocation from Smart Money.  This is a subject I plan to visit again in the future.  Excerpt with my highlights.

A time-honored investment adage is that your asset allocation should mirror your age: 60/40 stocks and bonds at age 40; 50/50 at fifty; 40/60 at sixty and so on.....So what's wrong with the allocation adage and the many funds based on it?  Plenty. Like many adages, this one strikes {the author} as grossly simplistic at best, and dangerous at worst.

......The age/allocation rule {must have originated at} a time when bonds were yielding considerably more than the near-zero investors are facing today....... The adage also fails to consider that as investors age and their life expectancies decline, so do their long-term financial needs. It also seems to assume that stocks are really high-risk assets that aging investors should steadily cut back on.

There's no question that returns are correlated with risk, and that stocks are more risky (and volatile) than bonds over most periods. But as long as your time horizon is ten years or longer (which should include everyone up to age 75 based on life expectancies) the risk in owning stocks seems exaggerated. The worst ten-year period for owning stocks since 1926 (1929-1938) produced an annualized loss of just -0.9, adjusted for inflation. By contrast the average return for all ten-year periods was an annualized gain of nearly 10% and the best returns were over 18%. 

Even in the last decade, with two market crashes, returns on stocks were essentially flat. In other words, the percentage of savings in stocks isn't likely to decline by much, let alone vanish, over ten years or more.{My Comment here:  The author might want to check his data because I've seen data that argues that the 2000's were the worst decade.  Certainly an index like the Nasdaq is nowhere near its 2000 level.  Irrespective of that point, his reasoning is basically sound regarding the data in my opinion.}

Investors should recognize that the adage is very conservative and risk-averse even for people age 60 and over. This may be appropriate for some investors who are close to retirement and haven't saved enough for a comfortable retirement and thus can't tolerate even the modestly higher risk of loss associated with long-term ownership of stocks......

By embracing policies that encourage risk taking, the Federal Reserve has helped ensure generous returns for shareholders, but correspondingly paltry returns for those who can't afford the greater risk. But the Fed's job is to promote economic growth and monitor inflation, not worry about the needs of retirees living on fixed incomes. The best solution is to never be in this plight in the first place, by saving and investing from a young age.....

....Like so many aspects of investing, simplicity is appealing but rarely effective. No matter what a person's age, an asset allocation plan has to start with an investor's net worth; balance expected returns with expected needs; and take into account risk tolerance. Everyone's circumstances will be different. Some people simply can't stomach volatility. But {the author's} hunch is that the age/allocation adage makes little sense for most people, and that many aging investors can and should allocate more to stocks than they do.

Link:  Why Age Alone Shouldn't Drive Asset Allocation.

*Long ETFs related to the NASDAQ 100 in client and personal accounts.