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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.

Now what?

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7 Comments

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  1. Index funds? Those really don’t seem that crazy. They do better than 70% of aggressively managed mutual funds. Not crazy.

    Here’s my list of crazy: ForEx, Options, Futures

    There’s more crazy. But I’m no fin-whiz, so I don’t know what they are.

    If you’re talking diversification, a 5-10% pure crazy portfolio sounds pretty sane to me. Half on the bull side, half on the bear side.

  2. Wrong. Old people who start “saving for retirement” late need a super aggressive strategy or they will be eating ALPO.

    If you start saving tiny amounts for your baby at tiny interest like 5% they will still be a millionaire by 65. But if you start when you’re 30 or 40 you have to get a much higher rate, and if you’re 50 then you have to gamble every day.

    So the truth is the opposite: When you have a lot of time you can be conservative. When you’re old, you have to be risky.

  3. Alex: Uh, no. In theory, older people “need to be more aggressive” to make the same returns, but the truth is that as you get older, your tolerance for risk goes down–and accordingly, so do your potential gains. Being risky means you also allow for downside risk–meaning that you could could potentially lose lots of your money in a given year. That’s simply not palatable for lots of older people who may be depending on that money for consistent income to live.

    That’s why time is a great mitigator of higher risk. It’s also why most older people invest in safer areas (e.g., bonds) and don’t have the same growth goals as younger people.

  4. It’s not a theory, it’s a fact. If you have time, even a low rate will do. If you don’t have time, you need a high return and the only place you get that is high risk according to conventional finance theory.

    I suspect you are thinking of a 60 year old with $1M versus a 20 year old with 10K. The 20 year old has little to lose and plenty of time for a risky strategy to pay off in spite of the bumps BUT: The 20 year old can also take a conservative strategy for 40 years and have it work out just fine.

    The 60 year old has her lifestyle to lose and no time to ride out the bumps. Undoubtedly she just wants to keep the million safe to turn it into a reliable 60K/year cash flow.

    A 60 year old with only 20K also has nothing to lose, and does not have the choice of a conservative strategy because she’s flat broke and outta time. She needs to multiply her money by 50 in a hurry! She’ll likely end up at the food bank whether she goes conservative and spends her equity or risky and loses it.

  5. Your math is wrong on the fast driver though he would not get there in 27.5 minutes he would get there in 20 minutes. 50% increase in speed = 50% increase in time saved.

  6. so 50% faster could…hmm equal death 50% sooner

  7. Hi Ramit, I know that the very young are your primary audience, but there’s a situation you left out, a common one here in the Bay Area. I’m 40, no kids, graduated from Stanford before there were columns like yours! Losing it all would not be disastrous for me in the way it would for Norm. However, unlike Stacy, moving back in with the parents would not be an option. In fact, the greatest potential for disaster lies in that direction — needing money to take care of them (both in their mid-seventies.)

    Hyper-growth mode does not seem appropriate. 60 year old mode, definitely not appropriate (actually that would be the most risky thing of all.)