As you get closer to or enter retirement, safe investing makes more sense for your portfolio than it did when you were a younger worker with decades of work ahead. Although everyone’s definition of safe investing is different, the considerations and actual approach should be the same.
What is Safe Investing?
The relatively safer (more conservative) part of your portfolio is the portion invested in cash or cash equivalents, such as money markets or CDs. Slightly more aggressive, but still reasonably conservative choices include fixed income investments, such as corporate or government bonds. The stock (equity) portion of your portfolio is the more risky segment. As you get older, the portion of your portfolio invested in stocks should decrease.
Advantages of Safe Investing
The primary advantage of safe investing is expected decreased volatility in the value of your portfolio. For the most part, your principal is not at risk when you invest in safe assets and as such, huge stock market swings will have noticeably less impact on your net worth than if you had large equity positions.
Disadvantages of Safe Investing
On the other hand, the long-term expected rate of return from safe investing is notably less than that from equities. Although you benefit from the security of low risk investing, you take on higher inflation risk. In other words, the purchasing power from your money may decrease over time, caused by a failure of your portfolio to achieve a return equaling the rate of inflation.
What to Consider When Contemplating Safe Investing
Your risk tolerance, age, and time until retirement are all key considerations when deciding what percentage of your portfolio should be in safe investments. Other factors include how large or a Social Security benefit you expect, your marital status, the existence and size of a defined benefit pension, and your expected cash-flow requirements.
