Myth #1: Your age is a good indicator of your risk tolerance.
Age-based investing takes as its premise that your age is a good proxy for your risk tolerance, and your portfolio can shift over time between equities, fixed-income and cash based on your age. Dead wrong, some advisors say.
Portfolio structure—based on an investor's risk tolerance—should factor in three main considerations: your ability, your willingness and your need to take risk, said certified financial planner Tim Maurer, director of personal finance for the BAM Alliance.
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Ability is partially based on the time horizon, and that's the single factor taken into account with target-date funds. But part of ability is also, such as an investor's stability of earned income.
Willingness is otherwise known as "the stomach acid test," and need is based on the return required to achieve your goals. How much are you willing to lose is as important a question as how much you need by retirement age.
Myth #2: All individuals of the same age act in a similar way.
Like ages think alike? Not necessarily.
Holland said that if a 25-year-old who doesn't know much about investing gets into a target-date fund and the portfolio is 90 percent equity-weighted, then declines 10 percent in a three-month period, that could trigger the investor to sell at a loss.
Worse, they could "be afraid of the markets for the rest of [their] life just because they have a low-risk tolerance," he said. "If you are just a nervous person, no matter how old you are, you will sell at loss."