Only the Good Buy Young

Why 20-year-olds should invest way more in the stock market, and 50-year-olds, way less.

By Tim Harford

Here are the chief investment lessons of the financial crisis for today's young people: They should be buying more stocks and running up debts to do so. I'm not saying that the market is undervalued—how would I know? I am merely suggesting a way of reducing risks.

If that seems strange, reflect for a moment. We know that stocks can be very volatile. We also know that some generations have been luckier than others when it comes to the performance of the stock market. The baby boomer who started regular purchases of U.S. stocks in 1970 and sold in 2000 would have felt pretty sick after the awful bear market of 1974, but in retrospect, his timing would have been perfect, filling his pockets with bargain late-1970s and early-1980s shares and selling out right at the top. His daughter, entering the stock market in 1995 and aiming to retire in 2025, would have spent the past 13 years buying shares at prices that now seem to range from high to extortionate. We could call this "generational risk."

Now think about the current prevailing wisdom on investing in shares, which reflects the fact that shares tend to produce high but risky returns. It is to start by putting most of one's savings into the stock market and as retirement approaches, increasingly shift one's portfolio to bonds and other less volatile investments. That seems to make sense. In fact, it is nonsense.

http://www.slate.com/id/2204247/