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I heard that as one gets older, one should invest more in safe assets such as bank accounts.

I would like to know the rationale for this recommendation.

For example, this Investopedia webpage recommends 80:20 for stock:bond in one's 20s, and 70:30 in one's 30s.

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  • the rationale is that if you lose all your savings on a bad investment, how will you recover? you won't, you'll starve and die under a bridge. Commented Feb 2, 2023 at 19:36

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That is pretty standard advice. If you take a hit early on, you have less invested so you don't lose as much, and you have a much longer time horizon in which things can recover. Later on, when the same percentage swing is a larger amount of money and you may be less able to wait for a better time to redeem some of the investments, it's usually better to reduce the amount of risk even if that does unavoidably reduce the expected return.

The best balances between stocks and bonds, income versus growth, domestic versus international, depend on how long you think you can wait before needing to spend the money and what your personal risk tolerances are (eg, whether you will panic if your investments lose 30% of their value as mine did last year, or trust that they will recover as mine are doing now). As I've said in other answers, there are folks who can advise you on this. "Free" advisors usually make their money from commission on the sales of things they recommend, and so many be biased toward whatever pays them best rather than what's best for you. There are other advisors who accept a fiduciary responsibility to put your needs first, but generally you need to pay them for the service; I still think that's a better choice, since they don't charge an unreasonable amount.

A good advisor will discuss a bunch of scenarios with you to get an idea of your risk tolerances, then suggest a mix of types of investments which has been tested against models of the stock market so they can give you an estimate of the likely range of returns for various lengths of time. If those ranges sound reasonable to you, you're all set. If they don't, you tell the advisor what you're concerned about and they try to tweak the advice to address your concerns (to the extent that they can; risk and return are unavoidably linked).

Once you have those more detailed percentages as an investment plan, I would recommend index funds (either traditional or ETF) as the way to start investing -- and you may never need to do anything but index funds. If you actually want to play with your money, and think you have the knowledge to make the gamble worthwhile, I would suggest setting aside a relatively small percentage for that purpose.

Some people will violently disagree with this advice, believing that they have a way to do better. They may even be right, though it's entirely too easy to convince yourself that you have a successful system when you've just had a series of lucky throws of the dice. Personally, I don't want the effort and aggravation; I am perfectly content to get market rate of return with near zero effort.

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