Monday, December 07, 2009

Choosing Certainty or Additional Returns

Knowing Your Own Risk Tolerance shares an interview with chief investment officer Michael Cembalest in which he notes that people can trade off liquidity for higher returns. Unfortunately, he observes, this trade off was overdone in the recent financial crisis.

His comment made me think about our allocation across certainty and additional returns for retirement savings. For us, funds needed in the short term (3-5 years) are in certain but low return investments. Mid term funds (5-10 years) are invested in CDs and bonds. Long term funds (over 10 years) are invested in equities, which offers higher returns. Spreading our savings across all categories results in an overall lower average return, but provides more stability during periods of high volatility, like last year.

Even though it appears the economy and stock market has stabilized, we will continue to allocate our savings across certain and higher return investments. While the short term investments continue have a very low return, the peace of mind of certainty is a worthwhile trade off for us.

For more on Strategies and Plans, check back every Monday for a new segment.

This is not financial or investing advice. Please consult a professional advisor.

Copyright © 2009 Achievement Catalyst, LLC

1 comment:

Edwin said...

It's not only the peace of mind that's worth the trade off, it's the security. If someone close to retirement (5-10 years) had a large amount of their retirement savings in equities, they lost so much money during this recent downturn that they will either have a much lower standard of living or will have to delay retirement for awhile just to regain those funds.

Having a lot of stability may lower the investment, but you just can't play the averages with retirement.