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“Shouldn’t you invest in something a little more safe?”

February 10, 2009

T is still in school, and doesn’t regularly contribute to his retirement accounts.  If he were to start investing tomorrow, his strategy would be extremely conservative.  Whenever the topic of how my retirement portfolio is doing, he seems sort of baffled that I’m still in stocks.   “Shouldn’t you invest in something a little more safe?”


image by MotherPie

“You should have two sets of money.  One portion is money that you will be needing soon, and the other portion is for retirement.  You want to grow the retirement portion as much as can, until you actually need it.”  Then I threw the single investing book I own at him and told him to read it.

Still, I can see his point.  It seems almost idiotic to dump over $1000 into various  retirement accounts each month only to see the balance decline by that same $1000.  So why am I still doing it?

[Sidenote: It is funny, when the stock market has good returns, no one thinks twice about how nicely their money growing and it seems so wise to be buying stocks.  Just like those people who had houses “appreciating” 20% a year didn’t wonder “Where is this money coming from?” However, if they fall 20% in a year, those same people panic and asks “Where did all that money go?!?!”]

Madame X at My Open Wallet posted a link to a “Comeback Calculator”  You can play around with the numbers and see when your portfolio will recover to its peak, and what you might end up with in 30 years.  I  first set my “rate of return” at 4.8% which the calculator says is the average rate of 3 month T-bills.  My 30 year result is about $894,000, assuming I save just $10k each year.  Now I choose 8.2%, which the calculator says is the S&P average.  The 30 year result, assuming the same $10k is $2,426,000.  (Note:  I don’t actually expect 8.2% return, but I do hope for something notably higher than 4.8%.)  That is why I’m still in stocks.

I still believe that in the long run (by the time I retire) my allocation will do better than a more conservative strategy.  I am still in stocks because I don’t think I can time the market (experts can’t) and I don’t want to be an active investor.

We do have a choice in the matter.  If you can’t bear to see the balance fall, invest more conservatively.  Be prepared to see your returns lag behind in boom years and hold value in bust years.  You can stay conservatively invested your whole life, but to make up for it, you will most likely either have to save more aggressively or end up with less money.

I accept the risks in hope that the system isn’t broken and that my money will be worth more in the end.  It is a risk. It is possible the market will never again return what people like to quote as “historical” returns.  What happened to Japan in the 1990s?  Could that happen here?  (Or pick any other scary example.)  What do you think?  With all the market craziness lately, are you still in stocks?  If so, why?

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9 Comments leave one →
  1. February 10, 2009 7:33 am

    Adding a nice chunk of bonds to the mix will help too. My non retirement accounts had no bonds and are down over 30%, retirement accounts had 15%-20% bonds and only down 20%. They limit the downside without being a huge drag on returns, lesson learned I added a bond fund to the mix. You can also put retirement money in CDs or money markets, take advantage of the tax benefits and put the money somewhere very conservative.

  2. February 10, 2009 11:29 am

    There are some days when I just want to transfer my money into the stable value funds and leave it, but then it’s like locking in the losses. I feel like there’s nothing I can do except keep investing, exactly the way I have been. I pretend the money isn’t real

    Just think, had we all panicked and pulled out of the market last January like we were told not to do, we’d be in a much better place now. Not that it does any good to think about it…

  3. February 10, 2009 1:04 pm

    I do have some bonds, but small percentage (i think 12%). I am operating under the belief that right now would be a horrible time to make my strategy more conservative. When (if?) the market recovers, I might adjust it a little more conservative, but I don’t want to do it when stocks are so low.

  4. nickydue permalink
    February 10, 2009 1:51 pm

    In my retirement accounts, I’m about 90% and 10% bonds. I have no intention of changing that allocation. It seems that everytime there is a recession, the death of equities is declared. I’m in it for the long haul, and stocks seem to be the only way get a return that outpaces inflation. Bad times suck, but that’s just the way the business cycle works. I think the economy will recover, eventually. Since no one knows when, I’m sticking to my strategy.

  5. February 10, 2009 11:18 pm

    I’m a lot like you, SP- I have about 95% stock and MAYBE 5% bonds. I’m 24 and have years and years before retirement, so can I take a hit right now and have plenty of time to recover? Of course!

    There’s no way I would be getting out of stocks right now. If you miss one of the big upturns in the market, you lose VAST amounts of money! Stick through the hard times and you’ll be just fine.

  6. February 10, 2009 11:18 pm

    PS Great picture! 🙂

  7. February 10, 2009 11:30 pm

    Exactly. Now isn’t time to rethink my asset allocation into something conservative. It would be an emotional reaction, not a logical one.

    And, thanks, I’m kind of proud! My first photo editing! It took me embarrassingly long to accomplish something relatively simple like that. I’ve never used anything more sophisticated than Picasa and even then, I usually just click “I’m feeling lucky” and call it good.

  8. February 11, 2009 7:33 am

    I’m not shifting into bonds, but I did add one bond fund to my now six monthly mutual fund purchases and I am putting snowflake money into I bonds. Most of my money still is going to stocks, it’s all with thought to the long term.

  9. frugalcpa permalink
    February 11, 2009 8:48 am

    I don’t have any money in stocks right now, but that’s because I just don’t have any money. If I did, I’d be buying stocks right now and every month, especially for retirement. With our whole careers ahead of us, we have plenty of time to weather out the tough times.

    That said, I plan to have a well-balanced portfolio that includes T-bills too.

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