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Tip: Invest with a time horizon in mind

Many people don't give enough consideration to their mix of investment assets

Many people don't give enough consideration to their mix of investment assets. I have talked in a previous Hugh-Tips about ensuring that you are sufficiently diversified across geographies, industries and asset types. Age should be an important component of the decision when considering how defensive you want to be when it comes to asset types. If you are about to retire and draw on your investments, 100% weighting in stocks would be inadvisable. That's because stock markets go through periodic drawdowns that can, at their worst, continue for five-plus years. In those cases, you don't want to be drawing down your capital when stock prices are low because you can erode your capital base early in your retirement and make it difficult to recover. On the other hand, if you have decades to go before needing to draw down, equities can make up a very high percentage of your investments. The US stock market has returned an average of 10% a year for the last 90 years. So, if you can make 10% a year through buying broad-based index funds, and you don't sell (thereby avoiding taxes), your money will double every seven years. That is a very healthy return and, paradoxically, it is lower risk than investing in Treasuries and investment-grade bonds, simply because of the extended time frame.

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