Economic Perspective: Investment Rules

MARY WALDEN:

“Today’s program looks at investment rules. Mike, the big question for individuals regarding their investments is how their collection of investments should change as they age. What’s the standard advice, and is it followed?”

MIKE WALDEN:

“Well the standard advice is that as a person ages they should put more of their investment funds in safer investments, and reduce the amount that we have in riskier investments. And I say we because we are in that older age period.”

“So for example, let me take two types of investments: bonds and stocks. Stocks tend to be riskier. Bonds tend to be less risky. So for example, if you’re someone age 30, standard advice might be to have 20 percent of your money in bonds, and 80 percent in stocks because you’re young. You’ve got time to recover from any kind of recession, and you’re going to make a lot more money with the stocks over a long period of time than you would with the bonds. Interest rates on bonds tend to be lower than the rate of return on stocks.”

“Conversely, then when you get, let’s say, age 60 then you might want to reverse those percentages. You might want to have only 20 percent of your money in stocks, and 80 percent in bonds because you’ve got less time, unfortunately, to recover from any big drop in the stock market. So safety becomes your top priority.”

“Now in terms of this investment advice is followed, we have a new study that looked at this, and looked at how people of different ages keep their money, invest their money. And it appears people don’t follow this investment advice at all. In fact, what was found is that as people aged they actually put a higher percentage of their investment funds in stocks than people who are younger.”

“What this means is that education may not be adequate to inform people how to invest their money, or there may be other factors at work determining how people put their money at work in the investment markets.”

Mike Walden is a William Neal Reynolds Distinguished Professor and Extension Economist in
the Department of Agricultural and Resource Economics at North Carolina State University who
teaches and writes on personal finance, economic outlook and public policy.