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Opinion: Act your age

Opinion: Act your age

OPINION

The amount of risk you can take depends on your age.

WHEN it comes to personal financial planning you should always act your age!

If you think about it carefully, it stands to reason. A 35-year-old career professional will always have a different investment strategy to that of an "end of career" 64-year-old.

The 35-year old - with 30 years of career earnings ahead of him - can afford to take increased risk in his financial plan.

The chances are that if he remains gainfully employed he will have enough time to earn money to cover any financial setbacks.

On the other hand, the 64-year old - with just one year to go - cannot afford to risk his savings or funds because he will normally not have enough career time to recoup any losses.

This does not mean that an investor should take huge risks in the hope of making massive gains - this, in effect, is gambling.

However, it does mean that investors should be aware of their attitude and capacity for accepting tolerable risks.

Risk factors

It is fairly common knowledge that certain investments could be considered riskier than others. For example, investing in small- cap company stocks could be considered riskier than investing in government bonds.

It is also common knowledge that your investment risk is relative to the length of time you hold on to your investment.

In general, the longer you hold an investment the less risk you take.

This is a particularly important point to remember when considering your investments and your age. To be assured of reaping reasonable returns on your investments, you should be in a position to hold them for relatively long periods of time - such as 20 years or more.

If this is not possible, then at the very least investors should plan to hold investments for 10 years to be able to expect any positive returns.

If you are in a position to hold investments for 10 years or more, then it can be reasonably assumed that you would have enough career time left to work to earn money to be able to recoup any setbacks.

It can also be reasonably assumed that being invested for such a long period will allow investors to "ride through" any downcycles in the economy or the markets that might have a negative effect on the original investment.

However, when it comes to risk and personal financial plans in general, it must be said that there is no plan that will fit all.

No size fits all

Often there are special needs that require specific attention - and ultimately specific plans.

As an example, let's take a young couple in their late 20s.

They are newlyweds and are currently living in rental accommodation.

They plan to buy a house.

In this case it would not be plausible to put all their money in long-term investments because they will need a portion of their savings in a short space of time.

Perhaps the best thing for them is to put their money in to an instant access savings account or a one-year certificate of deposit so that they can have almost instant access to it.

As a general rule of thumb, the younger an investor - the more aggressive the portfolio.

when it comes to risk and personal financial plans ... there is no plan that will fit all.

For example, investors in their 20s might consider a portfolio with investments in common stocks and funds as well as those of the international and emerging markets.
Such a portfolio would include diversification as well as exposure to potential growth areas.

However, it would not be suitable for an investor aged 55. At 55, investors need to become more conservative.

They should start considering their retirement years and start looking to move into products that offer income production.

A typical portfolio for those in their mid-50s might include five percent cash, 50 percent  stocks, 35 percent bonds and 10 percent real estate (in funds or property).

An investor in his late 60s might have a portfolio that consists of 10 percent cash, 30 percent stocks, 45 percent bonds and 15 percent real estate.

For those who find such planning complicated, there are funds that specialise in doing the planning for the investor.

They are called "Life Cycle" funds.

All you have to do is pick your target retirement date. Over time the fund will be re-balanced to take into account time left to invest - in general such funds become more conservative as you near your retirement date.

And for those who want more planning, more advice and more of a personal touch, there are also personal finance experts who are happy to assist!   

Your money matters!

Trevor Keidan is managing director of Infinity Financial Solutions, a firm providing impartial, tailor-made personal financial advice to clients in Cambodia and Southeast Asia. Should you wish to contact Trevor, please send an email to [email protected].

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