The idea persists that your portfolio should become more conservative as you age when in fact that’s not necessarily true. The truth is your age alone isn’t going to dictate whether you should become conservative with your portfolio or take risks with your portfolio. Rather, there are a number of factors that determine the makeup of your portfolio, and these factors are different for everyone. They include your personality, upbringing, social standing, your disposition to risk and your desired lifestyle, in addition to your age.
First let’s discuss what I would consider to be a conservative and aggressive portfolio.
What Is A Conservative Portfolio?
Defining what makes a portfolio conservative is a somewhat subjective exercise, but here are the parameters that I use. A conservative portfolio is one that doesn’t experience a lot of value fluctuation. In other words, it stays pretty much the same month to month but at the end of the year it generally outperforms GICs by 2%-3%.
What Is An Aggressive Portfolio?
Again, the answer to what makes a portfolio aggressive in design is a subjective one, but here are my thoughts. An aggressive portfolio is one that experiences more pronounced fluctuations month to month with the potential to increase or decrease dramatically. As for returns, you can generally expect to outperform the S&P/TSX or S&P500 indices by 2%-3% per year.
When Should You Take Risks With Your Portfolio And When Should You Be Conservative?
There are a few different ways to look at the question of when to take risks and when to be conservative with your portfolio. For example, it’s important to think about your goals. You’ll want to consider how much of your portfolio is meant for you and how much is meant for your heirs. I recommend asking yourself what you’ll need if you live to be 100. After determining that number, everything else in your portfolio can be left for your heirs. And since you won’t have an immediate need for that money, less conservative investing can lead to a higher return for your estate.
Another aspect that will affect whether to take risks with your portfolio or opt for more conservative investments is your personal situation. Let’s take a look at a hypothetical example: A widow with $150,000 in her portfolio at age 75, who is generally frugal, is likely going to be conservative. That makes sense for her. With her small portfolio, she can’t afford to lose at any time. Conversely, a couple in their eighties with a $5 million portfolio who don’t live extravagantly, can afford to take more risks with a portion of their investments to try to increase the value of their estate.
How To Gauge Your Tolerance For Risk.
It’s one thing to talk about risk; it’s another thing to actually take risk on—especially when it comes to investing. That’s why it’s important to determine what your comfort level truly is before any investment decisions are made. To accomplish this task I follow a three-step process. First, I ask clients to complete an investor-profile questionnaire. Next, I review their investment statements to get a sense of the types of investments they are currently holding. The third thing I do is have a conversation with them; talking about everything from investments and their financial goals to how they approach life. By getting a sense of the big picture, I can better analyze a client’s risk tolerance.