Age-Appropriate Investing

A strategy that will help you keep rash decisions at bay

When saving for retirement, don't make the mistake of buying or selling every time the stock market moves up or down. Investing decisions made in times of stress seldom prove to be wise. More importantly, you end up replacing your long-term investment strategy with a succession of knee-jerk reactions.

One of the best ways to keep from making rash decisions is to practise age-appropriate investing. That means your assets are generally allocated in ways that are suitable to your stage in life. You would likely take the biggest risks when you are young, as you have many years to make up for any potential losses. When you are older and retirement is looming, you may wish to take fewer risks, as losses could cut into your retirement nest egg and you don't have as much time to wait for a market rebound.

Here are sample asset allocations for different age groups. (They are based on couples with kids, but would work for single people, too.) Keep in mind that these allocations are hypothetical and that you should always consider your investment objective, time horizon and risk tolerance before making any investment decision.
 

You're in your 30s: You have two children, the oldest of whom is five. Your RRSP portfolio totals $75,000 and you're adding $5,000 a year to it. Here is a possible allocation for someone with a moderate tolerance for risk:

  • Stocks    70%
  • Bonds     20%
  • Cash       10%

If your personal risk tolerance is low, consider cutting back the stock allocation to 65% and increasing the cash allocation to 15%. If your risk tolerance is high, think about increasing the stock allocation to 75% and cutting the cash allocation to 5%.
 

You're in your 40s: Your children are teenagers. Your RRSP balance is now $150,000 and you are adding $10,000 a year to it. Here is a possible allocation if you have a moderate tolerance for risk:

  • Stocks    60%
  • Bonds     25%
  • Cash       15%

If your risk tolerance is low, you might cut the stock allocation to 55% and increase the cash allocation to 20%. If your risk tolerance is high, you might go to 65% stocks and 10% cash.
 

You're in your 50s: Your children are grown-up. Your RRSP portfolio has reached $250,000 and you are contributing the maximum to your plan each year. Here is a possible allocation for someone with average tolerance for risk:

  • Stocks    55%
  • Bonds     30%
  • Cash       15%

If your risk tolerance is low, you may want to cut the stock allocation to 50% and raise the cash allocation to 20%. If your risk tolerance is high, you may wish to raise the stock allocation to 60% and cut the cash allocation to 10%.

If appropriate, you should include stocks, bonds and cash in your allocations at every stage of your life. By spreading your RRSP contributions among all three main asset classes, you increase the likelihood of gains in your investments each year.

As you get older, income becomes more important and volatility tougher to withstand. But you should always consider keeping a portion of your retirement portfolio in stocks, since stocks have the potential to deliver the growth you need to keep your nest egg ahead of inflation.