You’ve maybe heard the adage that younger adults should consider higher-risk investments like stocks, while older adults should invest more in safer investments like bonds.
But Daniel Weiss, co-founder of the Tundidor & Weiss Investment Group, said that isn’t the whole picture.
“The standard notion is that, ‘Hey, you’re really young. You can take a lot of risk because if you fail, you have time to regrow,’ which is true. Don’t get me wrong,” Weiss said. “My problem with that is that there is no standard way of investing.”
He recommends people invest at a risk level that they feel comfortable with, regardless of age.
When investing, people have three choices in allocating their assets: stocks, bonds and cash. Stocks are riskier than bonds, in that there is more to gain over a long period of time at the risk of losing more in the short term, while cash is essentially just sitting money.
When creating a financial plan, Weiss asks his clients on a scale from zero to 10, how much risk they can tolerate with their investments, where a 10 might be investing in a risky, international start-up and a zero is basically cash in a shoebox under the mattress.
Weiss personally puts himself at a seven, but he has had clients in their 30s put themselves at a two and others who put themselves at a 10.
He recommends people invest how they feel comfortable, not based on how they’re told they should.
“Forget about where you think you should be,” Weiss said. “Forget about where people tell you you should be or where people your age are. What does your gut tell you? Because if you’re at a 10, and the market goes down 10 percent, you might lose 10 percent. But if you’re a one, or a zero I should say, you may not lose anything. What does your gut say?”
Weiss looks at his clients’ goals, such as when they want to retire and what kind of lifestyle they want to live in retirement. Usually, he said, people continue spending as much money in retirement as they did before. Other elements that go into consideration include required minimum distributions, which many people overlook.
“Everybody we work with is treated as an individual, and everyone we work with will mostly likely have a different plan than anyone else I will ever work with because no two people are the same,” Weiss said.
People should be planning at any age, not just when they come close to retirement or estate planning, Weiss said. A plan can be retirement planning, but it can also be financial planning for a vacation or a new car.
David Tobin, founder and managing member of Tobin Investment Planning LLC, said for his clients, the process of financial planning is the same, regardless of their age. The age of a client is just one of many elements that go into developing a financial plan.
“While age is one component, their spending habits, their health, whether they’re male or female, their life expectancy, certainly plays a substantial piece of the equation to come up with that final allocation,” Tobin said. “Maybe more importantly than sometimes age is really that clients are invested — they’re not sitting in cash waiting for the perfect moment. They’re not asset timing, they’re well diversified, and maybe most importantly is that they’re focused on costs.”
Creating a financial plan involves looking at a client’s risk profile — their risk tolerance, which is their willingness to take on risk, and their risk capacity, which is their ability to take on risk.
A younger person has a greater risk capacity because they have more time to make up lost money, even if risk tolerance is more based on an individual’s comfort level.
He also looks at a client’s wants and needs. People at different points in their lives tend to vary on this. For instance, a young adult is probably building assets and maybe needs to save money for their children’s education, while an older adult is probably past that and is looking more at retirement or health issues. The amount they’re spending doesn’t change that much over a lifetime, but what they’re spending on does.
“I can’t stress a plan enough,” Tobin said. “Everybody should have a plan.”
James Meyer, principal and chief investment officer at Tower Bridge Advisors, said investing adages are general rules of thumb, but they oversimplify the situation, as not everyone fits into them exactly.
He noted that the return on stocks is higher than on bonds, and the volatility of stocks is reduced the longer a person stays in the market. So a 30-year-old has more to gain and less to lose on a stock than a 70-year-old.
“Over a 20-year-plus basis, stocks have always outperformed bonds,” Meyer said. “Not most of the time. All of the time. If you have a long-term horizon, which is probably true for anyone under the age of 50 — except for extreme cases, unfortunate health circumstances — they should definitely be thinking of having the majority of their long-term retirement money in the stock market.”
Age is an important factor in coming up with a financial plan, but it certainly isn’t the only thing to consider.
There is also what Meyer refers to as “sleep quotient” — in other words, risk tolerance — which, in addition to other issues like health, is why plans need to be individualized.
Meyer recommends keeping your asset allocation within a certain range. He said it can be tweaked over time, but nothing too drastic.
“Each person is different, and the answer for each person is different,” Meyer said. “That’s why financial planners and estate planners are there, and that’s why they’re valuable.”
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