Risk: Why Timeframe Matters

Financial Life Planning for Busy Parents

Risk: It bears Repeating

Anything worth saying is worth repeating. - Humble the Poet We’ve talked about risk many times in the past. In particular, how you view risk. The reason the conversation bears repeating, other than the fact that I field this topic on the regular, is because it is tied to a strong emotion: anxiety.

Not taking a risk is the biggest risk

Many people “feel” like the safest way to save money is to hide it under a mattress (ok, not really, but savings accounts are today’s mattresses). Why? Watch the news. The stock market ticker runs at the bottom throughout many newscasts. People have market changes pinged directly to their phones. Do you know how often the market fluctuates, daily? If you do, then you know exactly what I am talking about. Do you view taking a risk as losing money? Then this podcast is for you! Join Matt Robison and I this week as we discuss how you should be looking at risk. Spoiler alert: risk isn’t losing money, it is losing purchasing power.

Risk: How long until retirement?

When deciding how to invest, consider the timeframe - it all depends on when you will need to spend the money.

1. 30+ years until retirement: You are just starting in your career, maybe you have one or two young children at home. Your best option for long-term investments are stocks. Over long periods of time (40+ years), stocks have always outperformed any other type of investment.
2. 10-20 years until retirement: Your kids are (mostly) grown, you’re paying college expenses, etc. The strategy here is almost the same as above: Stocks are still your best bet for 10+ years of investment. However, you need to balance that with anticipated costs for the next couple of years. For instance, the 529 account for your high school junior should be invested more conservatively than your 401(k).
3. About to retire or retired: Congratulations! Now your main concern is having your money last, being available when you need it, and keeping up with inflation. See below for the Retirement Bucket strategy!

These time frames are important when you look at historical market returns.

Retirement Buckets

Now that you are about to retire, or even better - you have already retired - you need to keep a close eye on your portfolio to ensure it will keep up with your ongoing needs.

1. Cash: Keep the next 1-2 years of expenses in cash and money market funds. You don’t want to lose that money!
2. Bonds: The following 2-7 years of expenses can be invested in very safe bonds or bond funds. This will get you some nice return (hopefully!) while not losing value.
3. Stocks: Any money that you plan to spend in 7+ years from now, you can consider investing in low-cost stock index funds. Stocks tend to ourperform over long periods (10+ years) and you want your retirement portfolio to keep up with inflation

The first two buckets above (1+2) are your war chest: the money you need to have to cover expenses over the next 5-7 years in case the stock market crashes.

Stocks for the Long Run

Need more proof that stocks are your best bet? Let’s pretend that you were around in 1802 and you were rich. You had a crisp $1 to save. Had you put it under your mattress and pulled it out this year, it would be worth a whopping $.04. Yes, you read that correctly. Four cents. Do you see how the dollars don’t make sense? Had you invested that $1 in the stock market, it would now be worth $1,601,184. Here is where the purchasing power comes into play. That dollar bill in 1802 could probably purchase dinner for the whole family. Uh, not so much in 2024! You can see from the chart that a dollar from 1802 has lost so much purchasing power that it can only buy 4.7 cents worth of goods. Bonds have done better, with a modest return from $1 to $1,746. Obviously, stocks far outpace cash and bonds. That’s why we say “stocks for the long run.” It is a common mistake to equate risk with volatility. Separating the two can help assuage the stress and anxiety brought on by market fluctuations if you just keep reminding yourself that time and strategy are on your side.