The myth
A common piece of investing advice is to start while you’re young because you’re able to take on more risk.
Time is on your side, as experts put it, so you can afford to hold a larger share of higher-risk, high-reward investments in your portfolio.
The reality
Higher-risk investments tend to be more volatile, meaning they can fluctuate up and down in value quickly. This volatility may be viewed as an advantage by those aiming to grow their money quickly.
There is a possibility, however, that a highly volatile investment will drop in value around the time you need to withdraw your money.
This is where young investors have an advantage. While you’re young, there’s time to wait out volatility. A high-risk investment may lose value in the short term but still grow in the long run.
Even if an investment does poorly and shows little hope of recovering, an early start gives you years to learn from mistakes, explore other options, and possibly bounce back from losses.
However, this piece of advice assumes you’re investing for a long period and have decades to wait out downturns or change course.
While long-term investing is ideal, you may also invest for short- and medium-term goals.
What if you’re aiming to grow money in 3 years for a downpayment on a house? An overly aggressive approach puts you at a higher risk of needing your money when the market is down.
If you don’t want to accept the loss, you may have to wait longer for recovery, which also means waiting longer to achieve your goal.
To know if you’re accepting the right amount of risk for your financial capacity, preferences, and goals, you need to learn your risk profile.
Your investor profile is a guide for taking calculated risk. The keyword here is calculated, because risk-taking in investing doesn’t equate to blindly picking the most aggressive assets in hopes they’ll grow fast.
If your risk profile is conservative or moderate, aggressive risk-taking might not be the best approach. Seeing big price swings can cause stress and lead to emotional decision-making.
Even aggressive investors should be smart about risk. It’s wise to balance aggressive investments with low-risk assets to keep a level of safety in case of unexpected events.
Further, smart risk-taking involves knowing when a fast-growing investment is backed by a solid business case and not simply fueled by hype or speculation.
Note that your risk profile can change as your situation evolves. You may become more conservative or more open to risk-taking as your financial situation changes.
Verdict: Partly true.
You have more time to recover from losses and ride out market ups and downs when you're young. However, your investing strategy should still be guided by your risk profile and goals to avoid accepting more risk than you can handle.
