A new user over at the Money StackExchange site asked a question about a particular portfolio:
Is the Yale Portfolio by David Swenson too conservative for a twenty-something with a mid-sized portfolio … ?
He asks if the portfolio is “too conservative.” He's been told (as we all have been, probably) that his investment allocation should be “less conservative” when he's young and “more conservative” when he's approaching retirement age. Usually this translates to “more stocks” when young and “more bonds and more cash” when old. The reasoning goes that one can stand more volatility in investments at a younger age because, although the value of the investment can go down substantially in the short term, the long-term returns make up for this and will beat the less-volatile, more conservative investments in the long term.
All well and good. But deep down, does this gentleman want others to tell him what his tolerance for volatility is? Does he really want people to tell him to have a higher percentage in stocks, or some other high-risk, high-reward investment vehicle?
Or, instead, does he want a warm fuzzy that this allocation is prudent? Conservative or not, is it intelligent and wise?
Having a prudent portfolio is far more important than having a portfolio that adheres to some age-related notion of risk tolerance. Basically, a prudent portfolio is the following:
- It is understandable. It's not prudent to invest in things that aren't fully understood. A “target date” retirement portfolio could have a perfect taper from stocks to bonds over time, but if there's no understanding of the investments, then it's imprudent.
- It is purposeful. Regardless of what is in the portfolio, the things put in the portfolio were put in there for good reason.
- It is researched. Frankly, I get a little leery of people speaking of stocks and bonds as if they're the only two kinds of investments in existence. They're common ones, but far from the only ones. It makes me wonder how much research went into constructing a portfolio if that's all that's there.
- It is monitored. Vehicles go in and out of favor all the time. Part of riding the way up is knowing when to get off before it goes off a cliff.
Following the advice that a large chunk of other investors follow will ensure that you're keeping pace with them. This can be good if these investors are doing well, and bad if they're not.
The main question is: “Is it prudent to trust the majority?” Or is it more prudent to reach your own conclusions on how to invest your money?
