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I have $800,000 sitting in a money market account because I don’t know what else to do with it. My hope was that I could put it in something that can yield around 4-5% growth. I also have $900,000 in my 401(k) that is sitting in minimal-risk accounts with Vanguard. I will be turning 62 years old later this year and cannot afford to lose or go back to what happened to me in the early 2000s.
-Kevin
I completely understand your concerns here Kevin. You’ve worked hard to accumulate these savings and it’s scary to think about risking them with something as unpredictable as the stock market. I think it’s important to honor those concerns while also understanding that there are risks to being too conservative as well. The end goal is to find a balance that works for you. (And if you need help selecting an asset allocation and investment plan appropriate for your risk tolerance, consider working with a financial advisor.)
First, it’s important to give appropriate respect to the concerns you have about the stock market. Investing is about much more than numbers. Investing is an emotional endeavor and the feelings you have about it matters.
Remember, consistency is one of the hallmarks of a successful investment plan. Sticking to your plan through the ups and downs rather than giving in to the frenzy of the day is one of the best ways to ensure that your money lasts as long as you need it to.
While I wouldn’t encourage you to completely give in to fear, it’s important to acknowledge it. Dismissing or minimizing your concerns would likely result in a strategy that doesn’t truly 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, consider working with a financial advisor.)
At the same time, it’s important to recognize that a stock market decline isn’t the only risk you face. There is also the risk of being too conservative.
The 4% rule — which essentially says that you can withdraw 4% of your investment portfolio each year in retirement with little risk of running out of money — is based on a portfolio consisting of 50% stocks and 50% bonds. Bill Bengen, who did the original research, actually looked at more conservative portfolios with between 0% and 25% stocks, as well, and found that they were less likely to last as long.
In other words, being too conservative with your portfolio actually reduces your odds of it lasting as long as you need it to.
