Time Affects Risk
Transcript:
Katie Nealis:
How does time horizon of my goals affect the risk I should take?
Easan Arulanantham:
So time horizon is kind of like that period you have between now and your goal. And so if you have a short time horizon, and you can’t easily replace that money you make, you have to scale back the risk. But if you have like a long time, right, let’s say for retirement, and you’re 40 years out, you can scale up that risk, because that time will, over time your volatility will go down, when you have that additional time, like the market, you know, becomes closer to the mean, essentially. And so there’s also that scaling down of risk as you get closer and closer to the goal, like for college planning, you know, when your child is a baby, you start super aggressive. And then when you get when they get closer and closer call it you know, their senior year, you’re gonna dial back that risk, because you want to keep that principal. So you have the money there when you need it.
Tom Vaughan:
Yeah, that’s a it’s a really interesting question. Because it, if you look, statistically, I think he’d go back to 1880. And look at the market as a whole. It’s only had 110 year losing period, I think that was 10 years and ended in 2009. And so, you know, time kind of alleviates some of the risk. But if you look at every one year period, there’s a lots of one year periods where you lost money. So you know, if you’re trying to save for something in the short term, the stock market can be a really brutal place to do it, you know, especially 100% into the stock market. Now, the one area that has actually this weird crossover is saving for a house in an area where the house prices are really high. And you know, it’s very competitive, and everybody’s putting in multiple bids. I’ve seen a lot of people take some really crazy risks on some of their a piece of their investment, you know, to try to get their down payment up or what have you. And if it doesn’t work, then you know, they have to wait longer to get their house. But so yeah, it’s very fascinating. The last piece, I’d say is it definitely you have to factor in your own risk tolerance.
For some people, no matter what, you know, time period, you’re talking about whether it’s long or short, they want to be really conservative, or in some cases, they want to be really aggressive. So that’s another piece too, is just your own personal outlook on risk and what you can tolerate. But the numbers basically don’t lie. If you’ve got a short term. Be careful with investing in the stock market. Yeah, I have a friend though. You know, he’s very conservative with his investments. And he’s only in his 20s. Yeah, he’s 40% stock and 60% bond, which is, but he believes that he can not just earn enough money, that he’ll be fine.
Now, yeah, risk is not directly related to age people think it is. I’ve seen people in their 20s are super conservative. My, my most aggressive client is 93. And so you know, that’s just he’s always been that way. Just what he does, and so yeah, the part of that, that you know, your own risk, your own kind of ability to handle that risk. I’m fairly aggressive. I’ve been doing this my whole life, I probably won’t change too drastically. You know, as I get older, it’s just, it’s sort of what I do. And so that’s true for lots of different people.