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Are You Too Old to Buy Stocks?

One of the worst things about getting older is that it seems like nobody wants you to have any fun. You have to be more careful about your health. When you exercise, you're supposed to keep your heart rate in a safe zone. Some retirees even face having their driver's licenses taken away once they reach a certain age.

It's much the same with investing. After spending a lifetime making investing decisions and gaining valuable experience in the stock market, you'll hear most financial planners tell you that you should take a more conservative approach with less stock exposure. They'll cite the risk of owning stocks and say it's too high once you get older.


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Consider your own situation
For many people, that logic makes sense. When you're young, you have time on your side, with decades before you'll need whatever money you save for retirement. With all of that time ahead of you, you can afford to take some big risks -- and even if your investments don't do well at first, it won't be fatal to your long-term financial prospects. That makes high-growth stocks a viable option, even when their prices can fluctuate much more wildly than the overall stock market.

On the other hand, as you approach or enter retirement, you no longer have the luxury of a long time horizon to weather stock market downturns. You need that money now, and if the next market crash happens to hit you at just the wrong moment, you may have to sell at very low prices just to pay your bills.

The concept that you should reduce your allocation to stocks is so universally accepted that certain types of mutual funds do it automatically. Target retirement funds change their investment strategy gradually over time to accommodate your changing risk tolerance. Yet even though these funds make investing automatic, they aren't able to handle all of the specific needs that you may have.

Why one-size-fits-all might not fit you
Reducing stock exposure as you get older only addresses one risk that investors face: the potential for falling stock prices. But that's not the only risk people have to deal with as they move toward retirement. Inflation is a huge threat to your long-term prospects, even if your portfolio is big enough to cover your costs at the beginning of your retirement years.

Low interest rates have been a big thorn in retirees' sides lately. Even if you lock up a $1 million portfolio in 10-year Treasury bonds, you'll only earn about $27,500 at current rates in order to cover expenses each year. Even if that's enough right now, your portfolio value will remain locked at that $1 million mark, and it won't be long before rising costs eat away the purchasing power of your fixed income.

Stocks, on the other hand, offer not only prices that rise over time but also rising dividends. Many well-known companies have histories of raising their dividend payouts annually for decades. When they push their dividends higher, it provides extra income that retirees can use to keep up with the impact of inflation. Moreover, that income can prevent you from having to sell shares at inopportune moments.

That said, some fortunate people have enough wealth that they can tolerate the risk of market downturns. For them, a typical retirement plan might involve selling some stocks every year to supplement other sources of retirement income.

You can protect against the risk of a market drop by keeping enough money in safer investments to give your stocks a chance to recover. Even though this strategy involves keeping several years' worth of expenses in bonds, CDs, or cash, it still gives you the ability to keep a substantial fraction of your portfolio in assets that will provide you a better return.

As an example, if you had retired in 2007 following this strategy, you might have chosen to forgo selling stocks in 2008 and 2009, waiting until the market recovered to sell and replenish your cash reserves.

Getting more conservative as you grow older is a basic rule of thumb, and it can be helpful for beginning investors to follow. The better choice, though, is to weigh the risks of different investment strategies and pick the one that will work best for you. That means you won't have to give up the fun of stock investing no matter how old you get.

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Read/Post Comments (3) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 30, 2014, at 2:51 PM, ellaerdos wrote:

    Dan;

    Your Metamucil must have gone bad.

    I'm over 70 and make and take more risks now then ever before, that's no bull*. At this time in my life I'm smarter, better educated, better financed and a lot less nervous. I would also have you note that most of the guru's I pay attention to are "mature" individuals, most over 50!

    I will stop trading stocks when my children pry the laptop from my cold dead claws.

    .7)

    * "bull" get it?

  • Report this Comment On April 30, 2014, at 3:13 PM, georgiegirl wrote:

    I inherited my husband's stock account 8 years ago and I am now 87 years old. I take more risks and make more money than he did. I intend to continue doing so as long as I can make it to my computer each morning.

  • Report this Comment On April 30, 2014, at 5:58 PM, ellaerdos wrote:

    Tell'm Georgiegirl !

    .7)

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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