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Why Should Older People Invest Less in Stocks than Younger People?: An Economic Analysis of Financial Planners' Advice, Federal Reserve Bank of Minneapolis Quarterly Review

Abstract

Financial planners typically advise people to shift investments away from stocks and toward bonds as they age. The planners commonly justify this advice in three ways. They argue that stocks are less risky over a young person's long investment horizon, that stocks are often necessary for young people to meet large financial obligations (like college tuition for their children), and that younger people have more years of labor income ahead with which to recover from the potential losses associated with stock ownership. This article uses economic reasoning to evaluate these three different justifications. It finds that the first two arguments do not make economic sense. The last argument is valid but only for people with labor income that is relatively uncorrelated with stock returns. If a person's labor income is highly correlated with stock returns, then that investor is better off shifting investments toward stocks over time.

Type

Article

Author(s)

Ravi Jagannathan, Narayana Kocherlakota

Date Published

1996

Citations

Jagannathan, Ravi, and Narayana Kocherlakota. 1996. Why Should Older People Invest Less in Stocks than Younger People?: An Economic Analysis of Financial Planners' Advice. Federal Reserve Bank of Minneapolis Quarterly Review. 20(3): 11-23.

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