Why Should Older People Invest Less in Stocks Than Younger People?

Posted on January 5, 2007
Filed Under Business tutorials, Investments, Save money and/or time

If you want to know the answer to this question read the following paper published by the Federal Reserve Bank of Minneapolis Quarterly Review. Vol. 20, No. 3, Summer 1996, pp. 11–23

Here is the Abstract.

Financial planners typically advise people to shift investments away from
stocks and toward bonds as they age. The planners commonly justify this
advice in three ways. They argue that stocks are less risky over a young
person’s long investment horizon, that stocks are often necessary for young
people to meet large financial obligations (like college tuition for their
children), and that younger people have more years of labor income ahead
with which to recover from the potential losses associated with stock
ownership. This article uses economic reasoning to evaluate these three
different justifications. It finds that the first two arguments do not make
economic sense. The last argument is valid—but only for people with labor
income that is relatively uncorrelated with stock returns. If a person’s labor
income is highly correlated with stock returns, then that investor is better off
shifting investments toward stocks over time.

The whole article is available here

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