It's common financial advice to hearthat the younger you are, the moreadventurous you should be in yourinvestments by taking on more risk. Thefurther you are from retirement, themore time you have to bounce backfrom an initial investment blow. Butthat is hard advice to swallow for ayoung doctor with a pile of studentloans and credit card debt, strugglingfrom paycheck to paycheck. Althoughyou may be younger and in a betterposition to take risk, you may not haveas much money to gamble with, whichcan make holding steadfast to a volatileinvestment a difficult task, according toa recent article in magazine.
The Risk in Staying Aggressive
Being aggressive means putting yourmoney into investments such as smallcap funds (ie, a mutual fund that holdsthe stocks of small capitalized companieswith a potential for growth), realestate, and international funds, ratherthan into lower risk assets like bondsand money market funds. But investingaggressively is an emotional ride.
Small cap funds are a perfect example.Though they have averaged 13% ayear over the past 2 decades, accordingto , keep in mind that in 9months in 2000 when large caps lost5%, small caps were down 28%—apainful drop for a young physician in atight financial situation.
During the housing boom, peoplelooked to real estate as an alternativeinvestment. But today, this tried andtrue method to a large return is now aburden to those with unsold propertiesor drowning in high interest rates fromtheir adjustable rate mortgage. Accordingto CNNMoney.com, a CommerceDepartment report showed the homeownervacancy rate rose to 2.7% in thefourth quarter of 2006, well above the2% the previous year.
And while international investingshould occupy a portion of your portfolio—taking advantage of the potentialfor growth in some foreign economies,particularly in emerging markets, is agreat way to diversify—wars, changesin currency exchange rates, and socialevents create unanticipated fluctuationsin your investment.
Finding the Right Balance
Before jumping into an aggressiveinvestment, review your current situationand what you anticipate for thenear future. If you presently have a largeamount of debt or are anticipating alarge expense, like purchasing a newhouse or starting a family, those circumstanceswill help you determine yourability to ride out the volatility of a riskyinvestment without panicking.
Your youth should not be the onlyfactor determining whether or not youshould pursue a roller-coaster investment—every person handles this investingstrategy differently and youmust find a balance both emotionallyand financially.