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I have $800,000 sitting in a money market account because I don’t know what else to do. My hope was that I could put it into something that could get about 4-5% growth. I also have $900,000 in my 401(k) sitting in minimal risk accounts with Vanguard. I will be 62 later this year and cannot afford to lose or go back to what happened to me in the early 2000’s..
– Kevin
I completely understand your concerns here Kevin. You’ve worked hard to accumulate these savings and it’s scary to think about them being at risk with something as unpredictable as the stock market. I think it’s important to respect these concerns while recognizing that there are also dangers in being too conservative. The end goal is to find a balance that works for you. (And if you need help choosing an appropriate asset allocation and investment plan for your risk tolerance, consider working with a financial advisor.)
First, it’s important to give due consideration to the concerns you have about the stock market. Investment is more than numbers. Investing is an emotional endeavor and the feelings you have about it matter.
Remember, consistency is a hallmark of a successful investment plan. Sticking to your plan through the ups and downs rather than getting involved in the frenzy of the day is one of the best ways to make sure your money lasts as long as you need it.
While I would encourage you not to give in to fear completely, it is important to acknowledge it. Eliminating or minimizing your concerns will likely result in a strategy that doesn’t really fit your investment personality, and in turn, lead to emotional decisions that negatively impact your returns. (And if you need help assessing your tolerance for risk, work with a financial advisor.)
At the same time, it’s important to recognize that a stock market downturn isn’t the only risk you face. There is also the danger of being too conservative.
The 4% rule — which basically says you can withdraw 4% of your investments each year in retirement with little risk of the money falling — is based on a portfolio that’s 50% stocks and 50% bonds. Bill Bingen, who did the original research, actually looked at more conservative portfolios with 0% and 25% stocks, and found that they had less potential over the long term.
In other words, being more conservative with your portfolio actually reduces your risk of this problem as much as you need it to.
Part of this is due to inflation. You need your money to grow just to keep up with inflation and allow you to continue to be able to afford the same expenses you always have. If your goal is to make sure you’ll have enough money to support yourself for the rest of your life, research says a significant allocation to equities is generally the right move. (And if you need help building an investment portfolio that matches your risk tolerance, consider aligning with a financial advisor.)
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 stick to what is good enough. You want a portfolio that is not so conservative that it causes you to fall behind on your goals, and not so aggressive that you take on more risk than you are comfortable with or able to handle.
If you’re looking for something that provides 4%-5% interest with little or no risk, you can get it now through special savings accounts, money market funds and certificates of deposit (CDs). Although these rates will fluctuate, unless you lock in a long-term CD, you may earn more or less depending on general economic conditions. And this strategy will definitely end up on the conservative end of things, which can hurt you in the long run.
As an alternative, a diversified portfolio of 60% stocks and 40% bonds might have a long-term expected return of 6%-6.5%, although this can certainly vary widely from year to year. I personally like to put my clients in a mix of index funds that track the US and international stock markets, as well as the US and international bond markets.
If you need more help, don’t be afraid to ask. Investing can be scary and confusing, and sometimes the peace of mind and behavioral coaching provided by a good financial advisor is worth the cost. (And if you need help finding a counselor, this tool can help match you with one.)
Just know that whatever you do, there will inevitably be ups and downs. And whatever you do, there will always be a different strategy you’ve chosen that would have worked better. If you can make peace with these things and stick to your “good enough” plan, you’ll be in good shape.
If you need help creating an investment plan that fits your risk tolerance and goals, a financial advisor can help. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors serving your area, and you can interview your advisors at no cost to decide which one is right for you. If you’re ready to find an advisor to help you achieve your financial goals, start now.
Consider a few consultants before settling on one. It’s important to make sure you find someone you trust to handle your money. As you consider your options, these are the questions you should ask an advisor to make sure you’re making the right choice.
Keep an emergency fund handy in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t subject to significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But a high interest account allows you to earn compound interest. Compare the savings accounts of these banks.
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Matt Baker, CFP®, is a SmartAsset financial planning columnist and answers readers’ questions about personal finance and tax topics. Have a question you want answered? Email AskAnAdvisor@smartasset.com and your questions will be answered in the next column.
Please note that Matt is not a participant in the SmartAsset AMP platform, is not an employee of SmartAsset, and he has been compensated for this article.
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