Personal Finance

Thinking About Investing Your Hard Earned Dollars:
Here are Some Things To Consider

by Kirk Lindstrom

Primer: Risk, reward and picking the right retirement portfolio

When you start dabbling in an investment portfolio, an aggressive asset allocation with 80% equities makes great sense. Over the long term, stocks have outperformed all asset classes. If you can afford to wait long enough, usually 16 to 20 years if you buy at the very worst time. When you are 30 years from retirement, you can wait out the bad periods, keep dollar cost averaging new money into the market when the market is down and know you will eventually be ahead. But when you are retired, you might not live long enough to make up for losses in a big bear market such as we had between 2000 and 2002. To keep volatility low and sleep well at night, people in or near retirement should have much less of their assets allocated to equities than someone a long way from retirement.

How do you know what asset allocation is best for you?
There are thousands of books, radio programs and TV shows and a whole industry of financial professionals that all try to tell you how to invest your money. What none of us can do is tell you how much risk is right for you. The immoral will try to trick you into thinking they can deliver better returns to you with less risk, if you just give them some money for the opportunity. Right now, hedge funds are the rage not because of the great returns they deliver to investors but because of the huge fees they generate for the people who run them! Many hedge funds deliver what sound like great returns but they neglect to tell you they have a small risk of losing most or all your money. Their returns are like picking up quarters in front of a steam roller; great as long as you don’t trip.

If your assets are large enough such that you can live well on 2% a year or less, then putting all your assets into TIPS that currently pay 2.4% above inflation should meet your needs for the rest of your life. That extra 0.4% gives some “cushion” for the official inflation numbers probably being a bit low.

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