A random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

THREE GUIDELINES TO
TAILORING A LIFE-CYCLE
INVESTMENT PLAN
Now that I have set the stage, the next sections present a life-
cycle guide to investing. We will look here at some general
rules that will be serviceable for most individuals at different
stages of their lives. In the next section I summarize them in

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an investment guide. Of course, no guide will fit every
individual case. Any game plan will require some alteration to
fit individual circumstances. This section reviews three broad
guidelines that will help you tailor an investment plan to your
particular circumstances.
1. Specific Needs Require Dedicated
Specific Assets
Always keep in mind: A specific need must be funded
with specific assets dedicated to that need. Consider a young
couple in their twenties attempting to build a retirement nest
egg. The advice in the life-cycle investment guide that follows
is certainly appropriate to meet those long-term objectives.
But suppose that the couple expects to need a $30,000 down
payment to purchase a house next year. That $30,000 to
meet a specific need should be invested in a safe security,
maturing when the money is required, such as a one-year
certificate of deposit (CD). Similarly, if college tuitions will
be needed in three, four, five, and six years, funds might be
invested in zero-coupon securities of the appropriate
maturity or in different CDs.

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2. Recognize Your Tolerance for
Risk
By far the biggest individual adjustment to the general
guidelines suggested concerns your own attitude toward risk.
It is for this reason that successful financial planning is more
of an art than a science. General guidelines can be extremely
helpful in determining what proportion of a person’s funds
should be deployed among different asset categories. But the
key to whether any recommended asset allocation works for
you is whether you are able to sleep at night. Risk tolerance
is an essential aspect of any financial plan, and only you can
evaluate your attitude toward risk. You can take some
comfort in the fact that the risk involved in investing in
common stocks and long-term bonds is reduced the longer the
time period over which you accumulate and hold your
investments. But you must have the temperament to accept
considerable short-term fluctuations in your portfolio’s value.
How did you feel when the market fell by almost 50 percent
in 2008? If you panicked and became physically ill because a
large proportion of your assets was invested in common
stocks, then clearly you should pare down the stock portion

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of your portfolio. Thus, subjective considerations also play a
major role in the asset allocations you can accept, and you
may legitimately stray from those recommended here
depending on your aversion to risk.