The US Air Force in the 1950s was in a major crisis. Even trained pilots were unable to control their planes. Accidents were a constant story. The initial conclusion was that poor training or pilot error might be the cause. But in-depth investigations revealed a shocking truth. The problem was not with the pilots, but with the cockpit of the plane!
Those cockpits were built based on the physical measurements of the ‘average’ pilot in the 1920s. But over the years, the physical makeup of Americans had changed. The Air Force found a way to solve the problem: find a new average. They collected more than 10,000 physical measurements from more than 4,000 pilots. Based on that, they designed the new cockpit.
The results surprised everyone. There was not a single pilot who fit the new ‘average’ measurements perfectly! Some had long legs and short arms. Others had a large chest and a small head. In short, the ‘average’ was a concept that did not exist in reality, but existed only in the figures.
From airplane to investment
What does this Air Force story have to do with the financial world? This connection becomes clear if we think about the financial advice we usually get. Young people should invest boldly in the equity market , because they have time to recover if they lose. As they get older, they should switch to safe fixed income investments. Investment in stocks should be in the ratio of ‘100 minus your age’. Retirees should stay away from stocks completely.
These are rules that sound very logical. But like the cockpit of the Air Force, these rules are based on the idea of a hypothetical average investor . The truth is that there is no such thing as an average investor.
Every investor has their own unique financial circumstances. Like the ‘jagged profile’ that researchers described in the case of pilots, everyone’s financial profile is different.
Same age, two lives
Let’s look at the example of two individuals of the same age. Two young people, both 25 years old, starting their careers. According to the general advice of financial experts, both should invest more in stocks. Because they have decades ahead of them.
But the first one is the sole breadwinner in the family, taking care of his elderly parents, paying for his sister’s education, and saving for his own wedding. The second one lives with his parents and has no other financial obligations. They have long years of financial independence ahead of them.
How true is it that just because they are the same age, they should have the same investment style? The first person has a greater need for quick cash, so they will need slightly safer investments. But the second person has the capacity to take more risk.
Now consider two people who are 60 years old and about to retire. The general advice is that both should withdraw their money from the stock market and invest it in government bonds or bank deposits that provide fixed income. But one has children who are still studying, a mortgage is not yet paid off, and they have to live on limited savings for the rest of their lives. The other has children who are well-off, owns a house, has rental income from an inherited property, and has more than enough savings.
Here, the first person needs a guaranteed income. But the second person can take more risk than a young investor because small fluctuations in the market (volatility) do not affect their lifestyle in any way.
Why does this ‘average’ approach persist?
Just as averages were convenient for the Air Force, the concept of the average investor is convenient for financial advisory firms. It helps them provide standardized advice, create simple calculators, and sell ‘one-size-fits-all’ investment products.
A wealth manager can easily put you into a model portfolio based on your age and a risk questionnaire. They don’t need to know the complex realities or needs of your life. This approach serves the efficiency of the industry, rather than the needs of the investor.
Find your own way
So what should you do instead of these general rules? The answer is to learn more about your own circumstances. Instead of copying someone else’s rules, you should design your own financial plan. To do this, ask yourself the following questions:
- How secure is your income? The income stability of a government employee and a freelancer is not the same.
- Who depends on you financially? How long will they need your support?
- What are your major expenses and liabilities? House rent, loan repayments (EMI), children’s fees, etc.
- Do you have assets that provide income that outpaces inflation? For example, a house that generates rental income.
- How much money do you need for immediate needs (liquidity)? This will help you avoid selling stocks when the market falls.
- How would you mentally cope if your investment fell by 30%? This is where your true ability to take risk is measured.
To avoid falling into the trap of averages
Remember, there is no such thing as an average investor in the financial world . Every person is different, with different needs, goals, and dreams. Therefore, it is dangerous to copy someone else’s investment strategy exactly.
Making investment decisions based solely on your age is like designing a cockpit based solely on a pilot’s height. Consider your income, liabilities, goals, and risk-taking ability to create a financial plan that suits you. Because personal finance is truly ‘personal’.
