Why Should Older People Invest Less in Stocks Than Younger People?

Abstract

Most financial planners advise their clients to shift their investments away from stocks and toward bonds as they age.For example, in The Wall Street Journal Guide to Planning Your Financial Future, Kenneth Morris, Alan Siegel, and Virginia Morris (1995, p. 7) tell people to make sure that the percentage of wealth they have in bonds is no more than their age.Similarly, Jane Bryant Quinn (1991, p. 489), investment columnist for Newsweek, tells investors to "tip toward higher risks if you ... are young."And in the classic book A Random Walk Down Wall Street, Burton Malkiel (1996, p. 411) advises "more common stocks for individuals early in the life cycle and more bonds for those nearer to retirement"; he says that "the longer the time period over which you can hold on to your investments, the greater should be the share of common stocks in your portfolio" (Malkiel 1996, pp.404-405).Despite their general agreement that investors should switch from stocks to bonds as they age, financial planners give different reasons for recommending this investment policy.At least three reasons are commonly offered.First, many financial planners argue, as does Malkiel (1996, p. 403), that "a substantial amount... of the risk of common-stock investment can be eliminated by adopting a program of long-term ownership," and, of course, older people don't have as many years ahead of them as do younger people.Second, some financial planners emphasize that asset allocation is often shaped by the necessity of meeting relatively large obligations in midlife,•The authors thank Karen Hovermale for valuable research assistance;

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