In the past week I have had three separate people say the same thing to me.
“I kept my money in cash since the 2008 crash because while I understand I’m not going to MAKE any money- at least I’m not going to LOSE any money.”
After the first person told me this I thought to myself, “I guess that is reasonable. I least they feel safe and secure.”
After the second person, I thought to myself, “I guess that makes sense, but is this really a rationale and logical way to approach this situation?”
After the third person, I thought to myself, “But you ARE losing money. You ARE losing money!”
You are losing money in two different ways.
- While you may be eliminating market risk, there are other risks at play here. Inflation risk is a very real issue. If inflation is increasing the price of goods and services by 3% per year and your money is making 1% per year, you are losing 2% per year of purchasing power.
- You are also exposing yourself to “opportunity risk.” If a balanced portfolio of stocks and bonds were to return 7% (which is approximately what happened last year) you just LOST 7%. Just because you didn’t see a red “minus” next to your account number, doesn’t mean you didn’t lose money.
I know, I know. Right now your brain is making all sorts of objections.
- Dave, what happens if the stock market crashes?!?! (Click here for my past article outlining this issue.)
- Dave, the market is at an all-time high! We are due for a crash! (Not true. Click here for my past article outlining this issue.)
- Dave, stocks and bonds are so risky! I can’t be gambling with my money. (Not true. Click here for my past article outlining this issue.)
The biggest risk you face in retirement is “longevity risk” which is the risk that you are going to live much longer than you expected.
Ironically, if your money is “safely” not working for you during your retired years, you could be dramatically increasing your chances of running out of money.
That’s right. People who are trying to protect themselves from running out of money might run out of money by trying to protect themselves from running out of money (wow, that was weird sentence).
The return of principal for bond funds and for funds with significant underlying bond holdings is not guaranteed. Fund shares are subject to the same interest rate, inflation and credit risks associated with the underlying bond holdings.
The value of fixed-income securities may be affected by changing interest rates and changes in credit ratings of the securities.
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