Investment is a process of allocating money to assets for creating wealth and achieving financial security. There are several investment options. Each comes with ample risk. Selection is largely based on the investor’s risk appetite. Also, traditional belief is that age determines an investor’s risk-taking capability. Is that true? Should we manage our portfolio based on age?
Risk Vs Age
Investing in equities can fetch great returns. However, the risk involved is high. According to the traditional school of thought, a person should reduce exposure to portfolio risk as he grows older. Here, risk primarily refers to equity risk. According to a thumb rule, the proportion of equity in your portfolio must be equivalent to 100 minus your age. For example, if you are 30 years old, your portfolio can have 70 per cent equity. This means as you grow older, you must move your portfolio from equity to debt. But it is time to change this thought.
The risk a person takes must be based on his financial goals, irrespective of age. Along with his goals, he must also consider the time period to achieve those goals, his financial situation as well the returns expected. These four things determine his risk appetite.
A 60-year-old person who wants to start a business after 10 years cannot depend on debt funds. Instead, equities will yield higher returns. Again, if a person’s goal is to earn stable and steady returns each month, he must invest in debt funds.
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September 20, 2020