Young investors truly have time on their side.
By starting to invest as early as possible with enough exposure to growth assets, young investors typically have plenty of time to ride through numerous investment cycles, cope with share market volatility and enjoy long-term compounding returns.
And young investors have much more time to recover from investment setbacks. They have pre-retirement investment horizons of up to 40-plus years and then many years of investing once eventually retired.
Young investors should have target asset allocations for their portfolios – the proportions of assets in different asset classes of mainly shares, property, fixed interest and cash – that reflect their usually higher tolerance to risk.
Unfortunately, many young investors may invest too conservatively for their own good.
The ASX Australian Investor Study 2017, carried out by Deloitte Access Economics, comments on a "disconnect between investor risk profiles and their return expectations". (The study focuses on investors who have at least some investments outside the big APRA-regulated super funds.)
Researchers found that young investors generally appear more risk averse than older investors, contrary to "conventional expectations" and challenging investor stereotypes. For instance, a very high percentage of investors under 35 were seeking guaranteed or stable investment returns.
The study comments that the risk aversion of young investors may be related to their growing up in the time of the global financial crisis (GFC). Their greater unwillingness to take risks might be linked to their inexperience as investors and level of their financial knowledge.
As the study comments, diversification is one of the most-effective ways to manage investment risk.
A well-diversified portfolio with a long-term asset allocation to reflect a young investor's tolerance to risk spreads the risks and opportunities as well as helping to smooth returns from growth assets over the long haul.
A fundamental understanding for young investors is to realise that time is on their side.
Head of Market Strategy and Communications at Vanguard.
09 August 2017