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Getting older. Yes, it is happening to all of us, but some will accept the inevitable more gracefully than others.
Thing is, as we go through life and age – whether gracefully or disgracefully – it is not just the colour of our hair or how many wrinkles we are gaining that we have to consider. Appearances change, but so do our financial needs.
So you need to think harder about how you are dealing with your money as you get older, because the sad fact is that if something goes wrong, you may have less time to wait for a market correction.
For example, the markets worldwide dived at the start of this month, sparked by fears that America could default on its debt. While this was avoided at the 11th hour by an extension of its borrowing limits, the procrastination before the decision was made has meant that for the first time in history, America’s credit rating has been downgraded from a perfect AAA.
There are also continued concerns that the sovereign debt crisis in Europe after a second bailout for Greece could spread further to Italy and Spain, both economies that are so large it would be very difficult to bail them out.
How long it will take for these market falls to recover is anyone’s guess at present, since many experts are fearful that we could have a second global recession. At the time of writing, the European Central Bank was planning to intervene to try and halt the sliding markets across the EU.
But the reason for pointing this out is because of the speed with which the falls have happened. The Hang Seng, for example, fell from 22,770 to 20,940 within a week.
Just think if you were about to retire, you could have lost a significant amount of your retirement fund within a week, and this is why it is vital you ensure your portfolio follows the way your life is as you get older.
When you are young, you will have fewer responsibilities, and can wait longer for any market falls to recover. So investing in higher risk areas, such as emerging markets or directly in stocks and shares, would be more appropriate.
Move forward a few years, you may have a family with children to take care of, not to mention saving for their future. So the laissez faire attitude you could have had to investing at an early age will give way – to a greater or lesser extent – to a more cautious point of view when it comes to investing. This would see you reducing the proportion of your funds invested in stocks and shares, and raising the number of ‘safer’ investments, such as bonds.
As you head towards retirement, you should invest even more heavily in bonds. There is a rule of thumb that you should have the equivalent amount of your portfolio relative to your age invested in bonds. It is a simplistic view, but you could do worse than follow it.
However, you don’t just need to wait for retirement to revisit your portfolio, you need to do this any time you have a change in your circumstances.
So if you have got married, divorced, had children, bought or sold a house, or even just had a birthday, you should make sure you take a look at your investments.
First published in Asia Life
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