Courtesy of Pam Martens.
Working on Wall Street for over two decades, I often heard financial advisors tell their clients that a good rule of thumb to determine how much of their investment money to put into stocks was to subtract their age from 100 and put the difference in stocks. For example, if your age is 54, subtract 54 from 100 and put the difference, 46 percent, of your investable money into stocks. If your age is 30, by this formula 70 percent of your funds would go into the stock market.
The overall theory is sensible: the older you are, the less risk you should take because you will not have enough earning years left to replace lost funds.
The high percentages recommended, however, felt like a formula cooked up by Wall Street to coax more money into the market. As with most things peddled on Wall Street, I never bought into this nonsense. Suggesting that anyone put 50 or 70 percent of their life savings into the stock market seemed like irresponsible advice to me.
As Wall Street has grown more corrupt over the years and financial statements for publicly traded companies have become more inscrutable, it isn’t at all clear if one is buying stocks or throwing down dice on a casino table.
If you are an investor who is not emotionally prepared to lose 22 percent of your money in one day (October 19, 1987, Dow Jones Industrial Average loss) or 38.5 percent in one year (2008 S&P 500 loss), just stay completely away from stocks or invest only an amount you can afford to lose. Many people do just that and live happy ever after.
People who are not emotionally prepared to see large declines in their principal will invariably buy at the top and then panic and sell into a sharp decline. They are better off not investing in stocks.
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