Are Your Retirement Investments Too Conservative?
According to a new study by Wells Fargo and reported on by Maurie Backman for USA Today 60% of Americans invest their retirement funds too conservatively. Instead of pursing more lucrative (while admittedly more risky) investments including stocks or even alternative investments, the portfolios of this majority tend to be weighted more towards safer bets, such as bonds. That might be a wise move for those nearing retirement but, for younger workers, it could be a big mistake.
What does “conservative” mean and what’s lost by shying away from risk?
Of course, when it comes to investing, the term “conservative” is subjective. For instance Backman cites an average annual return of 2% as fitting the term. So how do conservative investment strategies compare to more aggressive ones when it comes down to dollars and cents?
Suppose you set aside $300 a month in a retirement account for 30 years. If you saw an average annual return of 2%, you would end up with $146,000. By comparison a more moderate return of 4% would net you $202,000 after 30 years. At 6%, which would be considered moderately aggressive, that figure would grow to $284,000. As you can see, your contribution has a chance to go a lot further if you’re willing to take on a bit of risk. That being said, you will likely want to reduce your risk as you grow older.
Target date funds
When you’re younger more aggressive investments help you make the most out of your retirement contributions. But as your career winds to an end it becomes increasingly important to protect the money you have saved and so that it’s ready for you to utilize. These money moves can be made manually but automated options such as target date funds (TDFs) are also available.
Target date funds do have some downsides but overall can be extremely helpful for those saving for retirement. The “target date” in the name refers to the approximate year that you’ll be retiring. With that set, your investment portfolio will turn progressively more conservative over time, locking in the gains you made during your more aggressive investment years. While these types of funds may not be right for everyone, they can help those who are unsure of how must risk they should take to set their minds at ease.
As it turns out the majority of Americans might be too risk adverse for their own good. Investing conservatively might not sound like a bad thing but, if you’re young and can afford to be more aggressive, it could pay off big time. This isn’t to say that you should bet everything you have but it may be worth taking a closer look at your investments and diversifying your portfolio. Good luck.