Age-Invariant Asset Allocation

Photo Credit: Free Fergerson || Old & Young — we’re all human

It is often said that young people should invest more in stocks because they have more time to bounce back from bad market environments, and so they should take more risk. There is some merit to that argument.

But young people don’t have to fear inflation so much, because they have more years to earn wages. Older people should fear inflation because they aren’t earning anything more from their labor. If they are investing in bonds, they lose economic value, while with stocks that is less true. Commodities and short debt are helpful regarding inflation, but when inflation is non-existent, they are a dead weight in the portfolio.

I argue this way in order to say that there are good reasons for both the old and the young to own stocks. My personal view is that a constant asset allocation somewhere between 80% stocks and 20% bonds and an even split of 50/50 is optimal for almost everyone, most of the time.

My asset allocation has been near 70/30 for most of my life. Part of the reason for that is so that I can invest more aggressively during crises. I never have to worry about running out of assets. I don’t fear deflation or inflation.

Now to the Present

In the present environment, the stock market is poised to deliver 2.52%/year over the next ten years. You can do better with an investment-grade portfolio of bonds.

Should you reduce stock exposure? Yes, and your bonds should be split between long and short. The long bonds protect against deflation, the short bonds against inflation.

Do I know which risk will come — inflation or deflation? No. But I do know that stocks are stretched, and it will only take a minor crisis to knock them down. As such, add to your pile of safe assets.