Young investors can afford to play it safe when it comes to investing

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[Post contributed by reformedinvestor]

I recently learned that I may have been given bad investment advice.  I’m 32 now but I started working with a financial advisor when I was 26 years old.  At the time the stock market was the way to go.  If you weren’t invested in the stock market you were missing out.  So I socked all my savings away in the safest and most lucrative thing I knew, Wall Street.

My financial advisor told me that because I was so young, I should invest a bit more aggressively.  It made perfect sense; after all, I had 30-40 years to go until retirement. I could ride the ups and downs of the market cycles.

But what no one told me is this:

No one told me that because I was so young, I could actually afford to be invested more conservatively.  After all, I had 30-40 years to ride the stock market cycles and there was no need to put my savings in harm’s way for short-term gain.

No one told me that true diversification meant investing in a variety of assets, not just assets tied to the stock market.  I wish my financial advisor, who was marketed as someone who could give sound investment advice, would have told me to seek out alternative investments as well.  He may not have been able to help me find real estate to invest in, but he could have planted the seed about what true diversification really means.

No one told me what it means to ride the market cycles.  Who says the market will have a cycle?  Who knows for sure if the market will recover?  Just like no one can depend on lifetime pensions or Social Security checks, who’s to say the stock market, as we know it today, won’t change or go away altogether?

So here we are, in the Spring of 2009.  The markets have crashed.  Our 401(k)s have been decimated.  The unemployment rate is at 8.5% (by some measures, the unemployment rate is actually 18%+ if you calculate it based on pre-90’s calculation methods) .  Forecloses are abound.  And, now, with less money to show for it, I’m finally making changes in the way I invest.  Other young investors should take note too because your financial advisor may be omitting important information to you too.

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Comments

  1. Now would be the time to double-down and move more of your investments into segments of the market that aggressive investments (but not irresponsible ones). Investing aggressively and then moving your money to conservative investments when your investments are in the low part of their cycle is just a way to lock in losses. Start looking at companies and investments that are likely to survive, but are beaten down by the current economy, and add more money to them. Don’t take money out of investments that are in strong companies that have been hit hard, actually you should be moving more money into those investments.

  2. tmac,

    When are your investments in the low part of the cycle?

    What are strong companies?

    If answers to questions like these were easy to find, especially on a stock exchange ridden with accounting fraud, then everyone would be making good investments and nobody would be making bad investments.

    What I think is happening is people are putting together weak strategies based on guessing and those who encounter good luck pat themselves on the back while those who encounter bad luck either leave the table with less money or ride their bad luck out and squander their time and money instead of pursuing stronger investment strategies.

    I’m not sure how you got to my blog, but I encourage you to explore – you will find it is mostly about investing entirely outside of the stock market. If you’d like to know more, check out my new book at http://www.unlimitedinvesting.com.

    Jeff

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