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Age-Based Asset Allocation May Be Outdated

August 24, 2015

The popular portfolio-allocation model of investing based on age, which holds that younger investors should focus on stocks but peter out to more bonds as they approach retirement, is too simplified and does not fit everyone, experts tell CNBC.com.

Among several flaws, the logic behind the theory — younger investors can invest in historically more-volatile stocks because they have more time to recover — doesn’t take into account what a series of crises can do to an investor’s mentality, according to the news site.

Millennials have lived through a dot-com crash, a housing bubble and a recession, making them more risk averse than the level they are assigned based on the model. And only 26% of people under 30 own any stocks, according to Bankrate.com data cited by CNBC.com. This generation may have to go through “a couple of bear markets and they’ll realize that stocks do come back,” Rick Ferri, managing partner of investment-management firm Portfolio Solutions, tells the website.

On the other hand, older clients may have much more risk tolerance than the theory ascribes to them: Some have other assets for cash flow, so “their time horizon is actually their children’s time horizon,” says Richard Kagawa, president of Capital Resources and Insurance, as quoted by the publication.

The age-based theory also disregards specific life situations, such as supporting older parents, the amount of outstanding mortgage debt or the size of a pension, according to CNBC.com. In addition, current economic conditions are actually making bonds much riskier because of interest-rate risk, and the model does not have the flexibility to respond to this, the publication points out.

Finally, allocation to low-yielding bonds may leave retirees unable to keep up with inflation or their medical care expenses — the latter of which is projected to grow by 6.8% this year, according to a PwC Health Research Institute report CNBC.com cites.

By Alex Padalka
  • To read the CNBC.com article cited in this story, click here.