Finding out that an investment has lost value can be upsetting. So why not just put all your retirement savings into low-risk cash alternatives?* Limiting your investment selections to these so-called “safe” investments may seem like a good idea. But in reality, you’re trading the risk of losing money for another type of risk: low potential returns.
Not Enough Growth
When it comes to investing, risk and return are related. As risk decreases, return potential generally decreases, too. If you put everything into money market or other cash alternative investments, the growth of your retirement account may not keep up with inflation and you could lose purchasing power. Although there’s little risk of losing the amount you invest in cash alternatives, you risk earning returns that are too low to outpace inflation and reach your goals.
The Upside of Risk
Including some higher risk investment types, such as stocks and bonds, in your retirement portfolio gives you an opportunity to earn higher potential returns. The further away you are from retiring, the more investment risk you may be willing to take because your long time frame gives you more time to recover from losses. As retirement gets closer, it’s generally wise to decrease your portfolio’s risk exposure.
Variety Is Key
Choosing all low-risk investments can be anything but safe for retirement investors. Instead, choosing a well-diversified** mix of investments — which could include cash alternatives — may be the best way to meet your retirement investing goals.
A Long-term Look
20-year Average Annual Total Return (through December 31, 2011):
- Inflation1: 2.50%
- Bonds3: 6.50%
- Cash Alternatives2: 3.17%
- Stocks4: 7.81%
How CNB Can Help
Our experienced Investment Officers can help determine guidelines for your portfolio based on your investment time horizon and tolerance for risk. Contact us at 585-419-0670 for a portfolio review.
*Cash alternative investments may not be federally guaranteed or insured, and it is possible to lose money by investing in cash alternatives.
**Diversification does not guarantee a profit or protect against losses.
1 Represented by the Consumer Price Index (CPI).
2 Measured by U.S. Treasury bills.
3 Measured by Barclays Capital U.S. Aggregate Bond Index, an unmanaged index of U.S. government, corporate, and mortgage-backed securities.
4 Measured by the S&P 500 Index, an unmanaged index of stocks of 500 major corporations.
Source: NPI. Past performance does not guarantee future results. Your investment results will be different. This chart is for illustrative purposes only and does not represent the performance of any particular investment. Investments cannot be made in an index. Stocks have greater return potential, but are more volatile than other investment types. Unlike stocks and corporate bonds, government bonds and Treasury bills are guaranteed by the U.S. government and, if held to maturity, offer fixed rates of return and stable principal.