In the investment area, the focus for many decades was the question of how an investor would most sensibly deal with the inevitable risk on the financial markets, especially with regard to the changes in this risk over the course of his life. Traditionally, many practitioners resorted to the well-known rule of thumb, according to which the recommended share quota in the portfolioage is determined. This simple heuristic, often referred to as a “hundred of minus age”, suggests that the share of the total assets of the shares in total assets should be gradually reduced with age. The logic of this approach is that a young person has more time to compensate for losses after a price drop, while older people are already outshould be less risk-free for reasons of time. The intuitive attractiveness of this rule is that it enables age-appropriate risk profile adjustment and takes into account the individual need for security.
Academic Perspectives and the Irrelevance Theorem
In contrast, the theoretical view of the Nobel Prize winners of business, for example by Paul Samuelson with his famous irrelevance theorem. This model suggests that for the optimal management of investment risk, it does not matter how old the investor is, but that the risk appetite should remain constant. Samuelson argued that both young andOlder investors can also be equally affected by market fluctuations and therefore it makes little sense to systematically change the equity ratio over time. This theoretical position has been controversially discussed over decades and received a lot of attention, especially in academic circles, while in practice often met with skepticism.
Bridging theory and practice through human capital
Over time, however, it became apparent that both approaches are quite compatible with the concept of human capital. A person’s total assets are not only visible financial assets in the form of securities, savings or real estate, but also of the future income that he will still achieve in the course of his working life.While a young person usually has little-saved financial capital, his essential assets are his labor power, training and salary payments that are still to be expected. This so-called human capital gradually decreases over the years, as there are fewer and fewer future income expectations with increasing age and the financial assets acquired areincreases. At the end of working life, i.e. with the retirement, human capital is used up, while financial capital is ideally at its highest level.
The practical implementation of a constant risk structure
The apparent discrepancy between the Samuelson model and the traditional practice rule is resolved when one recognizes that the constant risk appetite must be related to the entire wealth. As young people hold the lion’s share of their assets in human capital, the actual risk in their overall portfolio could remain constant, although the share of securitiesinvested capital is initially higher. As a result, a higher equity ratio at a young age makes sense because the losses on the capital markets can be compensated for in the worst case by future income. The ratio shifts with increasing age and financial assets, so that the measured equity ratio decreases over time, even ifThe risk appetite on total assets actually remains unchanged.
Importance of investment horizon and goal definition
A frequently observed mistake in investing is that investors are confusing the terms availability and investment horizon. If you want to invest successfully, you should set clear goals at the beginning and specify the respective time horizon. It is a widespread misconception that frequent re-shifting, buying and selling securities to greater successwould lead. Rather, experience shows that long-term holding and the consistent taking of risk premiums ultimately make the decisive difference in wealth accumulation. The capital market rewards patience and perseverance, while short-term speculation often leads to unnecessary risks and costs.
The value of patience and long-term perspective
If you want to be successful on the capital markets, you should always keep in mind that sustainable wealth accumulation requires time and discipline. It makes little sense to hope for quick success or to artificially accelerate the process. Building a solid assets is a long-term project that is based on the consistent implementation of a well thought-out strategy andwillingness to endure fluctuations based. The temptation to achieve the goal faster through hectic action or the constant reaction to short-term market events often leads to wrong decisions and impairs the investment success. Rather, it is advisable to follow the chosen strategy consistently and to the force of the compound interest effect and the long-termtrust the opportunities of the capital markets.
The synthesis of theory and practice in the investment decision
As a result, the optimal control of the risk over the course of life requires a clever combination of theoretical reflection and practical adaptation. Anyone who includes both their own capital and financial assets in the planning can create a balanced risk structure that affects individual living conditions as well as the long-termOpportunities and challenges of the capital markets are taken into account. The art of successful investment is to keep patience, make rational decisions and not lose sight of the whole. Those who heed these principles are well prepared to master the ups and downs of the financial markets and build up wealth in the long term.
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