Strategy Beginner: Asset Allocation and the Investment Time Horizon

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Why might an asset allocation that is heavily weighted toward stocks, with only a small portion in bonds, be more appropriate for a 28-year old planning for retirement than for a 60-year old?

Younger people are less concerned about losing money than older people.

The 28-year old has a longer time horizon, and this will allow him or her to ride out temporary market fluctuations and take advantage of the long-term growth potential in the stock market.

This asset allocation would not be more appropriate for the younger person; the 60-year old should be equally heavily invested in stocks or stock mutual funds.

The general consensus among experts is that one should have zero exposure to the risks of the stock market once reaching the age of 60.

The 28-year old has a longer time horizon, and this will allow him or her to ride out temporary market fluctuations and take advantage of the long-term growth potential in the stock market. The older investor will have less time to make up for any short-term downturns in the stock market.

The possibility of crashes makes investing in stock a poor option for long-term investors.

True

False

False. Even with the Great Depression and the 1987 "Black Monday" crash, long-term investors have still done well investing in stocks.

If you are investing for your childs college education, when does your investment time horizon permit you to take the most risk?

When your child is born

When your child is in his or her mid-teens

When your child is entering college

When your child is a college junior

When your child is born. At this point, you have the longest to invest before you need to cash in on your investments. Your investment time horizon is the longest, thus permitting you to allocate capital to assets that are more volatile.

Which statement best describes the effect of investment time horizon on asset allocation strategies?

The longer you have to hold an investment, the more risk you can assume.

The longer you have to hold an investment, the more you should protect your capital.

The shorter your time horizon, the less risk you take with volatile investments.

None of the above

The longer you have to hold an investment, the more risk you can assume. This is true because long-term growth trends will tend to overcome short-term fluctuations in value. This is a key impact of investment time horizon on asset allocation.

Investors with long investment time horizons should always pursue volatile investments.

True

False

False. While longer horizons can help overcome short-term market fluctuations, investors who rely on investment capital or income for living expenses or emergency needs should take steps to protect their capital.