I have $800,000 in a money market account because I don’t know what else to do with it. My hope was that I could put it into something that could give about 4-5% growth. I also have $900,000 in my 401(k), which is in minimal risk accounts at Vanguard. I turn 62 later this year and can’t afford to lose or go back to what happened to me in the early 2000s.
-Kevin
I completely understand your concerns here, Kevin. You’ve worked hard to accumulate these savings, and it’s scary to think about risking them on something as unpredictable as the stock market. I think it’s important to consider these concerns while understanding that there are also risks in being too conservative. The end goal is to find a balance that works for you. (And if you need help choosing an asset allocation and investment plan that suits your risk tolerance, consider working with a financial advisor.)
Respect your discomfort
First, it is important to give appropriate respect to the concerns you have about the stock market. Investing is about much more than just numbers. Investing is an emotional endeavor and the feelings you have about it are important.
Remember that consistency is one of the hallmarks of a successful investment plan. Sticking to your plan through all the ups and downs instead of giving in to the hustle and bustle of the day is one of the best ways to ensure your money lasts as long as you need it.
While I don’t want to encourage you to completely give in to fear, it is important to acknowledge it. Neglecting or downplaying your concerns would likely result in a strategy that doesn’t really suit your investing personality and, in turn, lead to emotional decisions that negatively impact your returns. (And if you need help assessing your risk tolerance, consider working with a financial advisor.)
The downside of risk
At the same time, it is important to recognize that a decline in the stock market is not the only risk you face. There is also the danger of being too conservative.
The 4% rule – which essentially says that in retirement you can withdraw 4% of your investment portfolio each year without the risk of running out of money – is based on a portfolio that is 50% stocks and 50% stocks % consists of bonds. Bill Bengen, who conducted the original research, actually also looked at more conservative portfolios with equity allocations between 0% and 25% and found that they were less likely to last that long.
In other words, being too conservative with your portfolio actually reduces your chances of it lasting as long as you need it to.
Part of this is due to inflation. Your money needs to grow just to keep up with inflation and continue to afford the same expenses you always had. If your goal is to ensure you have enough money to support yourself for the rest of your life, research shows a significant allocation to stocks is generally the right move. (And if you need help building an investment portfolio that meets your risk tolerance, consider working with a financial advisor.)
Find the right balance
When I work with clients, I try to emphasize that there is no “right” answer. There is no perfect solution that will give you the exact return for the exact level of risk.
Instead, the goal is to land on something good enough. You want a portfolio that is not so conservative that it causes you to fall behind on your goals, and that is not so aggressive that it exposes you to more risk than you are comfortable with or can handle.
If you’re looking for something that offers 4-5% interest with little to no discounts, you can now get that with certain savings accounts, money market funds, and certificates of deposit (CDs). However, these rates fluctuate unless you secure a longer-term CD, so you could earn more or less depending on the overall economic situation. And this strategy would certainly fall on the conservative side, which could harm you in the long run.
Alternatively, a diversified portfolio of 60% stocks and 40% bonds would likely have a long-term expected return of 6% to 6.5%, although of course this can vary greatly from year to year. Personally, I like to place my clients in a mix of index funds that track the U.S. and international stock markets as well as the U.S. and international bond markets.
If you need further help, don’t be afraid to ask. Investing can be scary and confusing, and sometimes the reassurance and behavioral coaching of a good financial advisor can be well worth it. (And if you need help finding an advisor, this tool can help you find one.)
Bottom line
Just know that there will inevitably be ups and downs in everything you do. And whatever you do, you could always have chosen a different strategy that would have worked better. If you can make peace with these things and stay true to your “good enough” plan, you’ll be in good shape.
Tips for Finding a Financial Advisor
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If you need help creating an investment plan that meets your risk tolerance and goals, a financial advisor can help you. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three vetted financial advisors working in your region, and you can survey your matching advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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Consider a few advisors before choosing one. It is important that you find someone you trust to manage your money. As you weigh your options, consider asking an advisor these questions to ensure you are making the right choice.
Matt Becker, CFP®, is a financial planning columnist at SmartAsset, answering reader questions about personal finance and tax topics. Do you have a question you would like answered? Email [email protected] and your question may be answered in a future column.
Please note that Matt is not a participant in the SmartAdvisor Match platform and has received compensation for this article.
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