VIDEO: Retirement Investing Pitfall 3 – Taking Too Little Risk

 

Several weeks ago, I started a series of videos derived from a chapter in my best-selling book, Plan Smart Retire Right. In the book, I discuss Retirement Investing Pitfalls. In our previous video, I went over how taking too much investment risk in retirement can be dangerous. Today, I am going to cover a pitfall that many people may not think about as a risk…playing the market cautiously and taking on too little risk in retirement.

Being overly conservative with our money in retirement has the potential to negatively affect your portfolio over the long haul. Let me explain why. While minimal risk can feel like a safe move, you could miss important market rallies. During periods of market turbulence, many investors tend to flock to low-risk investments like U.S. Treasuries and cash. This aversion to risk can affect long-term investments, as too many fixed-rate investments can put a cap on your portfolio’s profitability. By trying to reduce portfolio losses, however, investors may be trading one type of risk for others – for example, inflation.

While equities can typically have greater loss potential than short-term, fixed-rate investments, they also can have a greater potential for upside gains. For many investors, hunkering down only in safe investments, may stunt the growth of an investment portfolio. In my opinion, inflation, which is the general increase in the cost of goods and services, is a serious concern when it comes to long-term investing. Too little growth in your investments can leave you with a shortfall in your retirement years if you aren’t keeping up with inflation, due to a decrease in your purchasing power. With inflation eating away at cash every year, it often makes sense for investors to have at least some of their money in growth-oriented investments to help offset the effects of inflation over time.