One of the more popular investment strategies is the “100 minus age” asset allocation rule.
Simply put, it means one must have “100 minus age” percent of investment assets allocated towards equity.
Example, a 21 year old must allocate 79% of her investment money to equity [stocks and variants such as equity mutual funds etc], and the remaining 21% towards safer [but with lower yields] options such as bonds, certificates, fixed deposits and such.
The justification provided for this “rule” is that the younger one is, the higher ones risk taking ability is. If a 21 year old loses most of her investment due to poor decisions, or just horrible market conditions like the one we are in right now, she still has a good 40 productive years ahead of her to correct that mistake.
That to me sounds like one of the stupidest investment strategies. Contrary to what the rule proposes, I think the younger one is, the more time one has to see one’s investments grow. A young person has the “luxury” to make safer [with lower returns of course] investments, and still come out on top due to the power of compounding.
For the more adventurous, I would recommend allowing some of the returns from the safer investment options to “spill over” into equities. However, safer investment options must always be the foundation of a solid investment portfolio.
Bottom line: Start early, play it safe, and you will never have to resort to “taking on a risk”.