I have $800,000 in a money market account because I don’t know what else to do with it. I was hoping to put it into something that would grow about 4-5%. I also have $900,000 in my 401(k) that’s in minimal risk accounts at Vanguard. I’m turning 62 later this year and can’t afford to lose it or go back to what happened to me in the early 2000s..
-Kevin
I totally understand your concerns here, Kevin. You’ve worked hard to build up 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 respect those concerns, but also understand that there are risks to being too conservative. The ultimate goal is to find a balance that works for you. (And if you need help selecting an asset allocation and investment plan that fits your risk tolerance, consider working with a financial advisor.)
Respect your discomfort
First, it is important to treat your stock market concerns with due respect. Investing is about much more than just numbers. Investing is an emotional endeavor and your feelings about it matter.
Remember that 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 madness of the day is one of the best ways to ensure that your money will last as long as you need it to.
While I wouldn’t recommend giving in to fear completely, it’s important to acknowledge it. Ignoring or minimizing your concerns will likely result in a strategy that doesn’t really fit your investing personality, and in turn, lead to emotional decisions that will negatively impact your returns. (And if you need help assessing your risk tolerance, consider working with a financial advisor.)
The downside of risk
At the same time, it is important to realize that a stock market decline is not 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 during retirement with little risk of running out of money — is based on a portfolio that is 50% stocks and 50% bonds. Bill Bengen, who did the original research, also looked at more conservative portfolios with between 0% and 25% stocks and found that they didn’t last as long.
In other words, if you are too conservative with your portfolio, it is less likely to last as long 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 to allow you to continue with the same expenses you’ve always had. If your goal is to ensure you have enough money to support yourself for the rest of your life, a significant allocation to stocks is generally the right move, the research says. (And if you need help building an investment portfolio that aligns with your risk tolerance, consider hiring a financial advisor.)
Finding the right balance
When I work with clients, I try to emphasize that there is no “right” answer here. There is no perfect solution that will give you the exact return for the exact level of risk.
Instead, the goal is to land on something that is good enough. You want a portfolio that is neither so conservative that you fall behind your goals, nor so aggressive that you are exposed to more risk than you are comfortable with or can handle.
If you’re looking for something that offers 4%-5% interest with little to no downside, you can get that now from certain savings accounts, money market funds, and certificates of deposit (CDs). However, those rates will fluctuate unless you lock in a longer-term CD, so you could earn more or less depending on overall economic conditions. And that strategy would certainly fall on the conservative side of things, which could hurt you in the long run.
Alternatively, a diversified portfolio of 60% stocks and 40% bonds would likely have a long-term expected return of 6%-6.5%, although of course that could vary widely from year to year. I personally like to place 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 of a good financial advisor is worth the cost. (And if you need help finding an advisor, this tool can help you find one.)
Conclusion
Just know that no matter what you do, there will inevitably be ups and downs. And no matter what you do, there will always be another strategy you could have chosen that would have worked out better. If you can make peace with those things and stay consistent with your “good enough” plan, you’ll be fine.
Tips for finding a financial advisor
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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 difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisors for free to determine which one is the best fit for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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Consider a few advisors before choosing one. It’s important to make sure you find someone you trust to manage your money. As you consider your options, these are the questions you should ask an advisor to ensure you make the right choice.
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Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid—in an account that isn’t subject to big swings like the stock market. The tradeoff is that the value of liquid assets can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
Matt Becker, CFP®, is a SmartAsset financial planning columnist who answers readers’ questions about personal finance and tax topics. Have a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Matt is not a participant in the SmartAsset AMP platform, is not an employee of SmartAsset, and has received compensation for this article.
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