Suppose you have a defined-contribution pension plan. As you go through your working life, in what order would you choose to have the following portfolio allocations?
a. 100% stocks: (Click to select)Best as you approach retirementBest early in your careerBest in the middle of your career.
b. 50% bonds and 50% stocks: (Click to select)Best in the middle of your careerBest as you approach retirementBest early in your career.
c. 100% bonds and money-market instruments: (Click to select)Best early in your careerBest in the middle of your careerBest as you approach retirement.
Why?
With a defined-contribution pension plan, your employer bears the risk associated with the asset allocation of the funds, so you do not need to be concerned about the order.
Early in your working life you should stick to safe, liquid instruments while you learn about investing and then gradually build up to a portfolio of stocks as you approach retirement.
Early in your working life, investing in stocks makes sense as they generally earn a relatively high rate of return and are relatively safe when held over the long term. As you approach retirement, you should gradually convert to bonds and more liquid instruments.
Early in your working life, investing in stocks makes sense as they generally earn a relatively high rate of return and are relatively safe when held over the long term. Around mid-career, you should switch everything into liquid instruments so you can reallocate your savings into bonds and stocks as your retirement approaches.