Converting to Conservative Investment Alternatives

A person's financial life would be much simpler if there were less investment choices from which to select. However, simpler does not always equate to better. Although the vast array of investment options can often be a bit overwhelming, they provide individuals with the ability to tailor a portfolio that best fits their needs.

Most experts would agree that regardless of which specific securities are chosen a younger individual would be best served by staying aggressive. These investments carry a fairly high amount of risk; however, they also have the highest amount of growth potential. In the long run, this works in an individual's advantage.

This can best be explained by examining the stock market. Historically, the market has shown plenty of short term volatility but it has always shown long term growth. This can be illustrated by imagining the history of the stock market being displayed on a graph. On the graph, picture marking the spot where the market was a hundred years ago and where it currently is today. Now connect the two points with a line. The line will steadily increase from left to right as the years go by. In between those two points there were periods of negative movement, (i.e. The Great Depression) but over time there was significant growth. This phenomenon explains why younger people are best suited for aggressive investments. They have the time necessary to overcome any short term volatility that may arise. Even if their investments loose money in the short term they will ultimately make significant gains.

There is only one potential problem with the above mentioned strategy. What if a person remains in these aggressive investments for too long? If a negative movement occurs in the market shortly before an individual plans to retire, then he may not have the time necessary to overcome the resulting loses. In order to prevent this from happening an investor should protect himself by shifting his investments into more conservative alternatives as retirement begins to draw near. A good rule of thumb is for individuals to assess their portfolio when they are 10 to 15 years away from retirement. At this point they should begin to increase the percentage of bond funds and other conservative security choices.