Managing Risk with Stocks
As I wrote last week, the range of outcomes for stocks actually increases at long time horizons. So why does the conventional wisdom say younger investors should hold the bulk of their assets in stocks and gradually reduce this proportion as they approach retirement?
Investors can fund retirement spending through both financial assets and human capital—the ability to earn income from work and contribute further savings to the financial portfolio. For younger investors, human capital typically dwarfs financial capital. Since human capital has lower volatility than, and is minimally correlated with, the stock market, younger investors can take on higher risk in the financial assets component (i.e., hold more in stocks).
Over time, as human capital depletes, the financial assets take over as the majority source supporting retirement spending. This implies the investment portfolio should be increasingly composed of capital-preserving assets such as bonds.
Disclosures
All expressions of opinion are subject to change. This information is not meant to constitute investment advice, a recommendation of any securities product or investment strategy (including account type), or an offer of any services or products for sale, nor is it intended to provide a sufficient basis on which to make an investment decision. Investors should consult with a financial professional regarding their individual circumstances before making investment decisions. Diversification neither assures a profit nor guarantees against loss in a declining market.
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