Why some older investors might invest in a long-term time horizon
MARKETWATCH 10:44 AM ET 7/24/2017
Going against the conventional wisdom
I recently wrote about why some investors have an unrealistic idea of what a long-term time horizon (https:// blogs.wsj.com/experts/2017/02/15/whats-the-long-run-for-investing-longer-than-you-think/) is in the stock market. In essence, I argued that in the stock market, five years is a short-term time horizon and returns measured over a period of less than 15 years are just noise.
In response to my article, I received an email from an 80-year-old reader who argued that position was of no value to an older investor because such a long-term time horizon is unrealistic for someone of his age. The reader argued that for older investors, five years is a long-term time horizon.
I often hear this concern from my older clients, but the dilemma isn't unique to older investors. An investor in his or her 30s saving for, say, a down payment on a house faces a similar issue.
In these cases, it is important to realize that the investor's lifespan and the time horizon of the portfolio are not one and the same. An investor with not that many years to live could have a portfolio that has a 30-year horizon. Conversely, an investor who is young and has many years to live might have a portfolio that is appropriately focused on the short term.
Let me explain.
I have clients with IRA accounts who are retired and who are able to cover all of their living expenses with the payments they receive from Social Security and their pension checks. Some of my clients in this position indicate that their goal for their IRA accounts is to leave them to their children so that each child can use the money to help fund their own retirement. In that instance, I would argue that the portfolio has a long-term time horizon even though the older investor may only have a short-term time horizon with regard to his or her lifespan.
Therefore, the portfolio has the ability to weather the storm of a prolonged bear market even though the initial owner of the account may not be alive to see the stock-market recovery. In these cases, it may be appropriate for an older investor to have a sizable portion of the portfolio invested in the stock market -- exactly the opposite of what conventional wisdom might dictate.
On the other hand, it is possible for a younger investor with a long-term lifespan to have a portfolio with a short- term time horizon. It all depends on when that person will need to tap that portfolio. This typically occurs when a younger investor has funds earmarked for a down payment on a home or has a 529 college-savings plan for a teenage child. In these cases, the portfolios will not have the ability to ride out the year-to-year fluctuations of the stock market and should probably be invested conservatively even though the investor is young enough to tolerate the short-term changes of the stock market.
Take, for instance, my wife and I. We are expecting our first child in August and are saving for a larger house to accommodate our growing family. We plan to purchase a larger home in the next 12 to 18 months. In this situation, we have a very short-term time horizon for the portfolio, even though our lives will (hopefully) have a long-term time horizon. In this case, all of the money that we have saved for the home down payment is in a very stable investment: a money-market mutual fund.
Again, that would run counter to the conventional wisdom that I should be thinking long term with my portfolio. And I understand that putting this savings into a money-money mutual fund will likely only generate a very low return. But I am investing my money in the money markets because I do not have the luxury of waiting out the swings of the stock market.
-Patrick Lach; 415-439-6400; AskNewswires@dowjones.com
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07-24-171044ET
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