Yesterday, I discussed the steps investors can take to put a financial contingency plan in place in case a day comes when they are incapacitated (view the article here). Today I’d like to follow up by dealing with another aspect of investing that looms larger as people grow older. Like a financial contingency plan, it is linked to the legacy you will leave your heirs.

Now and then I meet investors who say they are too old to consider the long term in their portfolios, and have switched from stocks to short-term instruments such as T-bills. Sometimes they support this decision with the time-worn one-liner from Ronald Reagan (or was it cigar-smoking comedian George Burns?): “I don’t even buy green bananas anymore.”

There are good reasons to stay out of the stock market, but being “too old to have a long term” isn’t one of them.

If you simply can’t accept any instability in the value of your holdings due to temperamental reasons, that alone is a good reason to sell your stocks, regardless of age. Likewise if you need every dollar you have for fixed financial commitments, such as coming up with a down payment on a home in the next three years or less.

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Investing advice: Look at your heirs’ time horizon, not yours

On the other hand, if you have substantially more money than you’ll need for the rest of your life, and you plan to leave the excess to your heirs, it makes sense to invest at least part of your legacy on their behalf. That is, invest based on their time horizon, not yours.

For instance, if your heirs are in their 40s, you should hold at least part of your portfolio in a selection of investments that would suit investors in their 40s. Of course, you’d still want to invest conservatively. But you’d want to take advantage of the many years that 40-somethings have till they reach retirement age.

If you hold your money in T-bills for the last few years of your life, it will generate a minimal return after taxes—you may actually lose money after accounting for taxes and inflation. After your death, it may take months or longer to settle your estate.

After that, your 40-something heirs may need time to put your legacy to work, especially if they are inexperienced as investors. They may have passed 50 by the time they get around to investing in an age-appropriate fashion. Missing out on, say, three years of even moderate returns can take a big bite out of the funds they’ll have a few decades later, in retirement.

COMMENTS PLEASE—Share your investment experience and opinions with fellow TSINetwork.ca members

Do you foresee the composition of your portfolio changing substantially as you grow older? Or do you plan to keep the same balance of investments you have now? Let us know what you think.