Some people believe they risk losing some or all of their money by investing. But did you know that not investing could be even riskier?
Let’s say a 35-year-old has decided to invest for her retirement and is putting $750 a month (a total of $9,000 a year) in a tax-deferred account such as a 401(k).
She’s convinced the bull market will halt suddenly, so she’s invested her money in a low-risk investment vehicle earning 6% a year.
Flash forward 25 years. This investor is about to retire and has accumulated roughly $523,000. Will it last another 20 years or so?
Perhaps not. After 25 years, $523,000 is equivalent to $244,000 (assuming 3% annual inflation). And when you take out what is owed in taxes, the total dwindles even more. It may not be enough to live on for 20 years.
The moral of the story: Don’t let all your savings sit in a checking or savings account because you fear risk.
To build a diversified portfolio, you should consider investing in individual stocks and bonds as well as cash or in mutual funds that hold these asset classes.
Of course, investing more aggressively isn’t an appropriate strategy for all investors. Returns are not guaranteed. But it is an option to consider.
Also, remember, diversification doesn’t end at having a mix of stocks, bonds and cash. There are many types of equity investments: growth, value, large-cap, small-cap, international, domestic.
There are also many types of bond investments, from municipal to high yield. And at any given time, one type tends to outperform the others. So be sure to consider all your options.
One option you may not want to consider is letting your money languish because you are afraid of risk. Your financial advisor can help you compare options to get the most from your hard-earned savings.