A Basic Theory About Age And Investing Has Been Debunked

Business Insider

The Glidepath model — young adults buy stocks, and old adults favor bonds — isn't all it's cracked up to be. 

That's according to Rob Arnott, the money manager who stood the strategy on its head by running a simulation of what would happen if investors did just the opposite and presented the shocking result in his paper, "The Glidepath Illusion." 

Arnott cites big portfolios and variable markets as two key reasons investors can't depend on target-date funds, but something else explains why they're not ideal: There's no perfect age for taking on risk. It's a personal choice. 

"There's no reason to change your risk tolerance just because you're getting older," says Nick Olesen, a Pennsylvania-based financial planner. "It's fine to take on less risk, but you shouldn't pare it down to have it all in bonds because that's what everyone tells you to do. Whatever [the investor's] risk tolerance is, that's what it's going to be. The old rule of age determining your bond portfolio of risk is fading away." 

And that's because there's no telling what the market will do, says Arnott (emphasis ours):

"Markets certainly don’t care about our Glidepath, so we’re as likely to have our best stock market returns late in our career as early. If the best stock market returns come early, it’s self-evident that we’ll finish richer with a Glidepath strategy. And, if the best stock market returns come late in our career, we’ll do well to ramp our risk up as our career evolves. But, in our 20s, how can we know whether stock returns will be better early or late in our careers?"

These days, millennials are more wary than ever of the market after watching their parents lose their nest eggs in the crash. Meanwhile, those boomers are the very investors more willing to take on risk to keep up with inflation and saddle up for big costs like supporting their kids through college, Olesen says. Since the old rules no longer apply, working toward goals matters more. 

"The idea is to maintain a risk level throughout a lifetime," he adds. "The way we manage assets is to maintain risk tolerance throughout your life. It's a 40-year process for some people, it's a long time. But people today have large goals. If you take off all that risk, you won't reach them." 

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