Balancing Risk and Age: Lifecycle Investing
Your age impacts heavily on the type of investments you need to be making. Over your lifetime as an investor, your appetite for risk (and return) evolves. As your tolerance of risk changes, so too does your choice of assets. The same investment product can look completely different to investors of different ages - as these helpful bullets explain:
As a young investor: Imagine that you’re 20 years old and have just landed a great job working for a large multinational. You’re earning enough money to put aside £100 a month in a fund that you plan to stick with for the next 40 years of your working life, but for now you want lots and lots of growth in your underlying investments. Therefore you’re willing to take on some risk now, and the long-term data on returns suggest that the riskiest, most rewarding of the major asset classes are shares.
Bonds, by contrast, are a bit boring and safe; although you probably won’t lose more than 20 per cent in any one year (called your maximum drawdown), equally you’re never going to bag anything that makes your fortune. In summary, as a thrusting young buck you quite sensibly decide that your risk tolerance is high and that you want to stack up on equity exposure and ‘go for it’ in terms of risk.
As an investor nearing retirement: You’re now a considerably older 60 year old. Retirement is only about five years away, and so you need to accumulate a large pot of savings capital to last you through to your twilight years (you may well live until you’re 90 if current longevity studies are right). Therefore, capital preservation is all-important to you. You absolutely can’t afford a capital loss or drawdown of something like 20 per cent in one year – and so you have a very negative view of shares and are a very big fan of bonds.
As a retired investor: Curiously, when the typical investor retires, the consensus on the ‘correct’ investment balance becomes a little muddier. On paper, retirees should be ultra cautious – they have to preserve their pension pot for a retirement that may last 30 or more years. But they also require an income to live on and the assets with the safest profile – bonds and government bonds or gilts – tend to pay the lowest yield.