How to Tell if You’re Being Too Conservative with Your Investments
Nobody wants to take a beating in the stock market, nor do they want to earn a minuscule return, which is why investing can be a balancing act. You don’t want to be too risky and lose everything, but at the same time, you need a return that is going to at the very least keep up with inflation. For investors who were burned in the past, it’s understandable to want to keep money in low-risk, safe investments. But getting too conservative can harm you even more, particularly if the return isn’t keeping up with inflation. With that in mind, here’s a look at four ways to determine if you are too conservative with your investments.
Your Asset Allocation Is Heavily Skewed Toward Bonds
The stock market crash of 2007 and 2008 sent many investors to the hills, and even today those nearing retirement are jittery about staying invested in the stock market. Many argue they would rather have a safer, stable, albeit lower, return rather than risk losing it all in another market decline. There’s no doubt that protecting your nest egg is important as you get closer to retirement, but so is seeing your money grow. With retirement lasting two or more decades, investors need to generate returns that at the least keep up with inflation but hopefully grow more than that. If the return is too low, your money will devalue, which means you will get less bang for your bucks.
To prevent that scenario from playing out, investors have to make sure they have a diversified investment portfolio that includes stocks and bonds. If your portfolio looks more like a bond fund, that’s a glaring sign you are being too conservative.
The Earnings Aren’t Meeting Your Goals
The main reason to invest is to grow your money. Those saving and investing for retirement or any other goal understand how much they need their money to increase to meet their financial objectives. But if the money isn’t growing fast enough or isn’t earning enough to meet your financial goals, then it can be a telltale sign your investment choices are too conservative. For your money to grow at least with the pace of inflation, you are going to have to take on some risk. It doesn’t mean you have to invest only in high-flying stocks, but you do want enough exposure to the stock market to have a decent return. If not you could end up with a shortfall in retirement, which could cause you to have to downsize your lifestyle.
You Have Enough Saved to Take On More Risk
Amassing a sizeable nest egg to live off of in retirement is the goal for countless workers. Some are going to be very successful at that, while others are going to struggle to save little if any at all. If you fall into the first category and are nearing retirement, chances are you’ve gotten into conservative, protection mode, which means you investments have gotten skewed more toward safe things like bonds and CDs. But if you already have enough saved for retirement in your coffers, then getting super conservative isn’t going to be the best option. After all, if you have a lot of money saved, you can afford to take on a little more risk. If you find yourself in a good position from a savings perspective and still you are invested largely in bonds, it may be a sign you need a little more risk in your life.
Your Retirement Date Is Many Years Away
Saving and protecting your nest egg are the two mantras for people nearing retirement. But if you are young and have many years left in the workforce, then being conservative can end up hurting your investments big time. That’s because of the power of compounding. The longer your money is invested in the stock market, the more it will grow. But if you are in say your 30s and have a conservative approach to investing, you aren’t going to see your money grow at a decent rate. Plus you risk your nest egg devaluing, which means you will have less buying power for your dollars. If you are just starting out or have many years left in the workforce, and you find your investment portfolio is full of safe and conservative investments, it may be time to take stock of your goals, time horizon, and true risk tolerance. Sure you want to protect your money, but history has shown that after every stock market decline, stocks recoup their losses and then some, which is why younger employees can tolerate more risk than their older brethren.
The Bottom Line
Investing can be a balancing act with investors trying to achieve growth but at the same time protect what they have already amassed. While it’s tempting to get conservative with your investments, particularly when the stock market is on a rollercoaster, being too conservative can have long-term ramifications whether it’s a decline in the value of your money or a big shortfall when you are ready to retire.
Your opinions are always welcome… comment: