Time diversification assumes that the risk adjusted performance of equities increases with longer time horizons. Assembling optimal portfolios involves consideration of not only investor risk tolerance, as suggested by modern portfolio theory, but also by the distance between investment and consumption period. For an average investor with a risk tolerance of between 4 and 7, optimal equity allocation rises to at least 50% equities after 5 years in the U.S. and in the 20-country average. Beyond 10 years, optimal equity allocations rise beyond 70% for both U.S. and global markets. An investor with an average level of risk aversion would allocate nearly double the allocation to equities for a long-run consumption goal versus a short-term investment.
This also agrees with the prediction of utility theory assuming constant relative risk aversion is that the fraction of equities in proportion to true total wealth is unchanged over time. For the time frames longer than 20 years most of you investments shall be in stocks. Since the human capital prospects can not be capitalized or borrowed on, to keep the portion of equities at a proper fraction of true total wealth, the young professionals should keep a relatively large fraction of their financial wealth in equities.
Right now, stocks are highly-valued — Shiller PE Ratio for S&P 500 is one of the highest in history. This means that the expected return of stocks is lower than usual, but still positive. Be conservative when making growth estimates, say assume 5–6% return. If you assume stocks will return 10% a year and they only return 5%, then you’re going to be surprised in a bad way when it comes time to retire. If market returns are low, then you just have to save more. Invest for the long haul and let compounding work for you.