Many of us can enjoy life much more if we are more conservative with our investments. Even Warren Buffett keeps a huge pile of cash at all times without worrying that he isn't trying to maximize his return. In his shareholder letter Buffett wrote, "The $20 billion-plus of cash equivalent assets that we customarily hold is earning a pittance at present, ... But we sleep well."
Retirement savers often take on more risk than is necessary. Let's use an extreme example to illustrate.
Our friend Bob, a executive in a Fortune 500 company, has amassed $5 million dollars in his retirement portfolio at age 45. He's light years ahead of most folks in retirement planning and, by all accounts, he's set for life. Yet, thinking he's at least 20 years away from retirement, he aggressively invests in the stock market with 70 percent of his portfolio in a diversified basket of equities. So far so good, right? With so many years ahead of him and plenty of time to catch up for periods of negative returns his portfolio should be rock solid. True, but the typical advice has one flaw. He really doesn't need more return.
8 percent annual returns are nice, but is it worth the occasional 40 percent decline? Let's say he instead puts all his assets into 30-year treasuries yielding roughly 4 percent annually. That's $200,000 in the first year, and more each year because of compound interest. Is that not enough? Some may argue that he's leaving money on the table. But should he be more interested in knowing he is going to be comfortable or chasing a net worth number?
You and me. Obviously not everyone has $5 million sitting at a bank. But this doesn't mean that the principle doesn't apply. Many of us can live happier if we have a bigger emergency fund. Increasing your risk isn't helping your retirement portfolio. Instead, work on your:
- Income. Do you have any skills that will allow you to earn a part time supplemental income? Can you make anything that could be sold on the Internet? A small side income can add to your savings in a big way. If you can make passive income, that's even better.
- Savings. Are you able to save every month? Can you move your money into your savings account first before you spend it?
- Spending Habits. Does all the stuff you bought really make your life any better? How about all those times you ate out? How many of those outings do you even remember?
With enough safety in your investments you can avoid selling at the market bottom. If we move a sizable portion of our retirement funds into safe investments, we too could sleep better when the market takes a dive.
David Ning runs MoneyNing, a personal finance site aimed at helping others change their habits for a better financial future. He suggests that everyone to sign up for an online savings account to get more out of our hard earned money.