Question

Pranoo is 32 years old. She’s had a steady job for 10 years and wants to change her investing portfolio, so she has more money when she retires at age 65. Should she be a conservative, moderate, or aggressive investor?

Answer 1

Pranoo, who is 32 years old, should consider an aggressive investment strategy to maximize the benefits of compound interest over a 33-year investment period. This strategy will allow for higher potential returns that can be compounded over time, with the option to shift to a more conservative approach as retirement nears.

Step-by-step explanation:

The investment strategy of a 30-year-old may differ significantly from that of a 65-year-old due to the time horizon until retirement. Someone at 30 has a longer time to invest and can therefore take on a more aggressive investment approach, opting for growth-oriented stocks that typically have higher volatility but potentially higher returns over time. As they approach retirement, it's common to shift towards a more conservative strategy, favoring income-generating and lower-risk investments to preserve capital and provide a steady income.

For Pranoo, who is 32 and planning to retire at 65, an aggressive investor profile may be more suitable, as she has a 33-year timeframe allowing her to benefit from the power of compound interest.

The formula for compound interest demonstrates how early investments can grow significantly over a long period, exemplified by a $3,000 investment at a 7% annual rate of return amounting to almost $45,000 in 40 years. Therefore, being aggressive at the beginning of her career can potentially lead to a larger retirement fund, with the opportunity to gradually shift to a more moderate or conservative approach as she ages.