Why Safe Investments Aren’t Necessarily Safer
Investing in the financial markets enables you to build wealth and propel you to another level. Within the investing community there are countless ways to invest your money and allow it to work for you. Certainly, the older you get the more reserved you’ll want to be, but safe investment aren’t necessarily safer. With the average lifespan increasing, investing your money in a so-called safe investment may preserve your capital but could stunt your returns, causing you to outlive your money. Outliving your nest egg not only puts you in a financial bind but also could affect your current living situation.
In order to better prepare for your long life, it may not be as efficient to switch to an all bond portfolio once you retire. If you have a large enough portfolio you can likely withstand an economic downturn.
According to The Balance, a ten-year period ending September 30, 2014, the S&P 500 returned 8.11% as an annual average while the bond index had an average annual return of 4.62%. If you keep in mind that inflation is around 2%, returns are substantially lower in a bond portfolio, putting you at risk to begin losing your principal balance at a more rapid pace. Also, if you would have invested$100 back in 1928, in equities you would have $399,885 but with treasury bonds, a measly $7,309.
In order to better understand money placement, you’ll need to understand your financial goals. The retirement age in the United States is 67, and with life going on well into your 80’s and 90’s, that’s an additional 25 years you’ll need your money to last. However, within those 25 years you can likely grow your portfolio even more.
The balance is to measure the amount of risk your portfolio can withstand, and combining that with your required rate of return and expected life. Ideally, you would have a healthy portfolio that even if you kept in a traditional 60/40 portfolio throughout retirement, it can handle the swings of the market. If you’ve contemplated going to an all bond portfolio, take a minute to reconsider the alternatives.
Instead of going 100% bonds and eliminating a large portion of your upside potential, look at keeping a portion of your portfolio in equities. Even if the market were to turn negative the next year or two, you would still have ample time to recover and still make money, based upon life expectancy.
Ultimately it is your portfolio and everyone’s situation is different. However, keep in mind the money you are potentially leaving on the table. Next time you meet with your financial advisor, bring up the option of keeping a portion of your allocation during retirement in equities to generate more alpha, without overextending your risk profile or jeopardizing the portfolio as a whole. Even in a bond portfolio, you are taking risk and if you are already taking on a certain level of risk you should be compensated for it accordingly. Every bear market in history has been followed with a bull market, generating more returns and while bonds tend to do well in those few years, it may not be enough to last you through retirement.