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Who can assume a lot of risk?
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The simple answer is the young and those with many years left before they have to meet their investment objective.
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We'll tackle the age issue first. If you are young, you can generally assume more short-term risk because you have many more years to recoup any losses. Financial advisors generally recommend that young investors who are saving for retirement accept the higher risk of investing in more aggressive portfolios with the hope of being rewarded for taking higher risk with higher long-term returns. Generally, the more you have allocated to stock, the more aggressive your portfolio.
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But age shouldn't be the only factor you use to decide how much investment risk to assume. The second issue is the time horizon to your objective. For example, if you're investing in order to buy a car in 12 months, you generally can't afford a lot of fluctuation in your account no matter whether you are age 20 or 80. That's because you don't want to take the chance of your investment being down when the time comes to withdraw the money to purchase the car.
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For a medium-term goal such as saving to buy a house in five to 10 years, you may be able to accept more fluctuation in your account, especially if a lot of the saving is still in the future. In this case, a moderate level of risk may be suitable for you when you start saving. But as the time when youa'll need the money nears, you'll need to shift to a more conservative portfolio, because most of your financial assets are now in the account and not in the form of future paychecks.
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If you have several decades to go before you reach your objective, you may be able to afford investing heavily in the stock market. In fact, you may have to invest aggressively in order to achieve your investment objective.
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At the end of the day, achieving your goal is what really matters in investing. As long as you get what you want from your investments at the end of your time horizon, it doesn't matter how much your account fluctuates in the interim.
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