The Inherent Risks of Investing too Conservatively

In today’s environment, the biggest mistake pre-retirees and retirees can make is to invest too conservatively. I read an extensive study by Fidelity Investments that offers clear evidence that portfolios overly weighted in “safe” investments are likely to exhaust their assets well before today’s life expectancy. It showed that a portfolio invested in 100% fixed or short term vehicles would be exhausted within 25 years base on a 5% draw down rate; whereas a portfolio with just 20% allocated in stocks would last another five years. A properly diversified portfolio of 50% stocks, 40% bonds and 10% in short term vehicles, would last indefinitely.

Increasing your exposure to equities, especially as part of your retirement income plan, may seem like a scary proposition. While there is risk, you are far more likely to lose asset value and purchasing power to inflation and longevity when investing too conservatively. Research has shown that the deliberate assumption of risk, when applied to a properly diversified portfolio of stocks, bonds and cash will consistently generate above-average returns while reducing overall portfolio volatility. It is through the management of risk, not the management of investments that the optimum level of stability and returns are achieved, and that must be the critical objective for any retiree.