The Nature of Investment Risk

The Nature of Investment Risk Page 2

Investors can put this information to work by using the following table as a guideline.

Investment Horizon	Guidelines for Maximum Equity Allocation
0-3 years	0% equity
4 years	10% equity
5 years	20% equity
6 years	30% equity
7 years	40% equity
8 years	50% equity
9 years	60% equity
10 years	70% equity
11-14 years	80% equity
15-19 years	90% equity
20+ years	100% equity

The above table is just a guideline. For example, investors with a greater tolerance for risk might construct a table that begins at three years and adds 20% per annum. Remember, however, that investors should perform the "stomach acid test," checking their net asset allocation to ensure that their portfolios don't contain too high an equity asset allocation given their tolerance for risk. As Peter Lynch put it in Beating the Street: "Your ultimate success or failure will depend on your ability to ignore the worries of the world long enough to allow your investments to succeed. It isn't the head, but the stomach that determines [your] fate."

Investors should be conscious of the fact that, as the investment time horizon lengthens, they begin to trade one risk (the risk that equities will underperform) for another kind of risk (that inflation will erode the purchasing power of their portfolio). Finding the proper balance is a critical ingredient to the winning the investment strategy. ~

Larry Swedroe is the Director of Research for Buckingham Asset Management. He is author of 'The Only Guide to a Winning Investment Strategy You'll Ever Need,' which is available online.

05-24-00
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