Saturday, June 20, 2009

Portfolio choice and aging in a down economy

Today's Times includes an article about investment strategies for folks nearing retirement now that the stock market has been down for several years. My favorite quote is from one of the investment advisors, who says, “One of my rules is don’t do something. Just stand there.” This is the often-heard 'buy and hold' advice based on stocks' good performance in the long run.

Another theme permeating the article is reductions in risk-taking through age, and the advisors phrase it in terms either of increasing aversion to risk or mean reversion in stock returns. But theoretically speaking, if you have Social Security and you're spending down your financial assets, you should actually go riskier as you age, because you can never "cash out" of Social Security, and it's basically risk-free in the short to medium run.

But do investment advisors see an increasingly select type of client through age? In other words, if you're comfortable with your investments, you won't get advice. If you're worried, you will. Can this help explain traditional investment advice about portfolio choice?