Aggressive or Conservative Investing as You Get Older?
We get conflicting information from the financial community about how we should modify our investments as we age.
There is consensus about what to do when we are younger: save as much as we responsibly can, and invest it as aggressively as we are comfortable doing, on the principle that, over the long run, higher investment risk will lead to higher investment reward.
But once we get into our fifties and sixties and beyond, the “long” run isn’t as long as it used to be. In fact, it may be only a few years, perhaps even less, before we need to start withdrawing from our savings, either to cover a portion of our normal living expenses, or to finance a major change in the second half of our lives.
The traditional advice for older investors has been to go conservative: use government or AAA-rated corporate bonds, preferred stocks, and/or certificates of deposit, so that our principal is safe even if the return on our investments is fairly modest.
Over the past decade or so, however, quite a few financial institutions and individual advisors have been promoting the idea that, even in retirement, we should all continue to invest aggressively. Why? Because people are living longer these days, and since inflation is pretty much a fact of life, our investments need to grow if we are going to maintain our living standard over an extended period of time.
There are some legitimate insights behind this argument, but the conclusion is false – or at least, radically oversimplified. And I don’t think it’s coincidental that this pitch is being made mainly by people whose compensation or profits depend on the use of more aggressive investment strategies – i.e., securities firms, and individual investment advisors who get paid by taking an annual percentage of the funds they manage. I am not saying that these people are corrupt, but only that (like many of us) they do not seem motivated to carry their analysis deeper than the level where it happens to benefit them. Unfortunately, journalists have often accepted this half-baked analysis at face value and even the most reputable financial publications have uncritically passed it along to the rest of us.
What they are missing is at least two factors that are lying there in plain sight, not to mention several other more technical considerations that we don’t have space to deal with here. But sticking to the main two points:
The first is that inflation is not as big an issue as it is often made out to be, because for most people, its effects are modest once they get into their 80s and 90s. The truly elderly just don’t spend money the way they used to, often because they don’t want to, and probably at least as often because they are limited physically, mentally, or both. True, some costs like property taxes, utilities, and medical expenses can continue to rise, but others (travel, dining out, clothing, home improvements, transportation, etc.) actually decline and some of them typically disappear altogether, so that overall expenses often stay level, or at least don’t change very much. So the inflation problem, though real, is limited in its timeframe, and automatic inflation adjustments to Social Security and to some pensions reduce its bite even more.
The second key point is that, to the extent we do need to increase our spending power in our later years, and to the extent that this requires growth in our assets (which is by no means the only possible way of covering for inflation), this implies only that we need to avoid spending every last bit of our investment income. It doesn’t tell us what that level of income should be. If we want our assets, and thus our income, to grow by 2% a year, for example, we can do that by earning 8% and spending 6%, or by earning 6% and spending 4%.
By spending less, of course, we are constraining our budgets. But taking financially aggressive positions in order to fatten our budgets risks the loss not only of our income, but of our underlying assets as well – as many people discovered in the recent downturn. And when that happens, we take a real hit to our standard of living. Furthermore, once we are retired, it is difficult and often impossible to make up for such losses. What amounts to a mere temporary setback for the younger generation (or even an opportunity to buy into the market at bargain prices) tends to be a permanent loss for those of us in the older generation (what the younger folks gain, someone loses – guess who?).
If you are still working, you should continue to save, and increase your savings, if you can. But once you stop working, or start working for less income, your risks automatically increase, because you continue to age while having fewer options for dealing with financial adversity. You cannot reduce your overall level of risk by taking on more risk! Thinking that you can is the fundamental fallacy behind the “invest for growth” mantra.
When you get to that stage in life, if you do not have the financial resources to support your preferred lifestyle, then the smart alternatives are either to go out and work for additional financial resources, or else to pare back your expenses to a level you really can afford. Although this latter choice requires an adjustment that sometimes (not always) is temporarily painful, most people find that they can be just as happy at a reduced level of expenditure. They can even end up happier, because they have simplified their lives a bit – by moving into a smaller house, for instance – and they have also reduced the constant, nagging financial stress they have been living with.
Succumbing to financial advice urging you to take on more investment risk might work, if you’re lucky, but there is also a good chance that you are just buying trouble. So unless you fall within that minority of people who have so much financial oomph that they really don’t have to worry about ever running out of money, you are probably unwise to gamble on getting higher investment returns. Instead, you should follow the traditional advice to invest conservatively, and if necessary, modify your career plans or your lifestyle accordingly.