We get more conservative with investments as we get older
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As we get older, we naturally get more conservative with our money. That’s why, when we’re young, it pays to be aggressive with our investments.
I like to drive fast. A few days ago, I drove on a long trip and realized something: It’s probably not worth it to drive so fast. I ran a quick calculation and discovered that, if 2 drivers drove in a 40mph zone, the sensible driver (40mph) would take 30 minutes to drive 20 miles. The fast driver (60mph) would indeed get there faster–but it would take him 27.5 minutes for a grand savings of 2.5 minutes.* I was disgusted with my findings.
I was also disgusted with myself for thinking like an old man. This kind of thinking, I realized, is why grad students start wearing bike helmets and why Americans don’t eat street food in third world countries. They think the risk just isn’t worth it.
We naturally get more conservative as we get older. When it comes to finances, you are (or should be) in hyper-growth mode in your 20s. You can afford great volatility of stocks, and your timeline is long enough to mitigate most reasonable risk. More importantly, we don’t have kids, mortgages, and huge car payments to support. Let me draw out 3 scenarios to show you why investing as much as you can (and as aggressively as you can) is important when you’re young:
- The 23-year-old girl who has a fairly well-paying job. Let’s call her Stacy because that name is hot. Stacy is smart enough to put away $5,000-$10,000 per year in an aggressive mix of stocks and index funds. Even if she lost everything, she could go home, live with Mom and Dad, and get back on her feet in a few months. Stacy is in hyper-growth mode and I like her.
- The 33-year-old guy with a wife and 2 kids. This time it’s a guy named Norm. Norm is smart and wants to save as much as he can, but he has car payments, a mortgage, and god damned diapers to buy (they are shockingly expensive). He can only save $2,000/year even though he’s making much more than Stacy, who is still hot. Also, he can’t really afford to make many risky investments, since any sort of major loss would be disastrous. As a result, he moves some of his portfolio to bonds and mutual funds. Norm is in growth mode but is constrained by his situation.
- The retired 67-year-old. I like old people. That’s why I’m not ashamed to make jokes about them. This old man is named Gil and he is basically a caricature of old people: He’s retired and can’t afford many risky investments because he needs to know exactly how much money is coming in each month. Why? Gil is old so he needs money for bingo, medicine, and whatever else old people do. As a result, he invests primarily in bonds, mutual funds, and cash. Gil is in true conservation mode; because he’s retired, he has to live on what he’s got.
See? We naturally get more conservative as we get older. A catastrophic loss (losing it all) wouldn’t really be all that bad at 23, but it would be much, much harder at 33. At 65 years old, it could literally be a life-or-death matter.
The point is that if you’re young, embrace the fact that you’re in hyper-growth mode. Save all you can (which is usually all you think you can plus at least 10%) and invest as aggressively as possible.
Thanks for reading.
More about choosing an appropriate mix of investments: All about asset allocation.
*The calculation was based on a city-driving scenario in which the fast driver can only go top speed (60mph) 25% of the time due to stop signs, etc. The rest of the time, he drives 40mph.