I have $800,000 in a money market account because I don’t know what else to do with it. I was hoping I could put it into something that could deliver about 4-5% growth. I also have $900,000 in my 401(k) held in minimal risk accounts at Vanguard. I’m turning 62 later this year and can’t 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 amass 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 acknowledge these concerns while understanding that there are also 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’s important to appropriately respect 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 matter.
Remember, consistency is one of the hallmarks of a successful investment plan. Sticking to your plan despite the ups and downs, rather than giving in to the madness of the day, is one of the best ways to ensure your money lasts as long as you need it.
While I wouldn’t encourage you to give in to fear completely, it’s important to acknowledge it. Ignoring or minimizing your concerns would likely result in a strategy that doesn’t really suit your investing personality, and in turn lead to emotional decisions that 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’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 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 that is 50% equities and consists of 50% bonds. Bill Bengen, who did the original research, also looked at more conservative portfolios with between 0% and 25% equities, and found that they were less likely to last as long.
In other words, being too conservative with your portfolio will make it less likely to last as long as it needs to.
Some of this is due to inflation. You need your money to grow just to keep up with inflation and allow you to continue paying the same expenses you’ve always had. If your goal is to ensure you have enough money to cover your living expenses for the rest of your life, the research shows that a significant allocation to stocks is generally the right move. (And if you need help building an investment portfolio tailored to your risk tolerance, consider consulting 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’s good enough. You want a portfolio that is not so conservative that you fall behind on your goals, and not so aggressive that you are exposed to more risk than you are comfortable with or can handle.
If you’re looking for something that earns 4%-5% interest with little to no downside, you can get that right now from select savings accounts, money market funds, and certificates of deposit (CDs). However, these rates will fluctuate unless you commit to a longer-term CD, so you can earn more or less depending on general economic conditions. And this strategy would definitely 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 an expected long-term return of 6%-6.5%, although that can obviously vary widely from year to year. Personally, I 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 from a good financial advisor can be well worth the cost. (And if you need help finding an advisor, this tool can help you find one.)
In short
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 these things and stay consistent with your “good enough” plan, you will be in good shape.
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 does not have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can interview your advisors for free to decide which one is right 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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Have an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But with a high-interest account, you can earn compound interest. Compare savings accounts from these banks.
Matt Becker, CFP®, is a financial planning columnist at SmartAsset, answering reader questions about personal finance and tax topics. Do you have a question that you would 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 been compensated for this article.
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