In Chapter 1 we introduce the “Ten Prinicples of Personal Finance”, and number 8 on that list is Risk and Return Go Hand–in-Hand. It’s hard to make much of a return if you aren’t willing to take on some risk – in other words, playing it safe guarantees low returns. Of course no one likes risk, but if you’re investing over a long period of time, you can afford to take on additional risk. In Chapter 11, we discuss just this in the section titled Meeting Your Investment Goals and the Time Dimension of Risk. Why does a longer time span and greater risk go hand-in-hand? Because the longer your time horizon, the more time you have to make adjustments in your portfolio, consumption, and working habits if things don’t work out as planned.
Toward the end of Chapter 11 we looked at several model portfolios, and as you can see, they tend to decrease in risk exposure as you get older. That’s how things should work – but lately, according to the recent Wall Street Journal article, “The Young and the Riskless,” twentysomething investors are avoiding risk – just the opposite of what they should be doing.
Certainly, not everyone is the same. Some twentysomethings suffer from volatile salaries or job insecurity, for them, their initial investments may also be part of their emergency funds. Still, the avoidance of risk on the part of young people has grown recently. In fact, according to the article, in 1998 54% of young investors said they were willing to take above average or substantial risk – in 2011 that percent had dropped to 31%.
- For a twentysomething, what do you think is the appropriate percent of total investments to keep in stocks? Be prepared to discuss in class.
- Why do you think twentysomethings have become more conservative in recent years? Be prepared to discuss in class.
- Take a look at the article “The Young and the Riskless.” At the end of the article three different investment allocations are provided, which do you think is most appropriate for you, why? Be prepared to discuss in class.
- Take the Investment Risk Tolerance Quiz and be prepared to share your findings with your class.