Prudent or just paranoid

Protecting your money is the smart thing to do. But how do you know when you're being too cautious for your own good?

We're headed for recession and maybe stagflation. Get out of stocks...
Advice:
We're headed for recession and maybe stagflation. Get out of stocks...
"This is not a low-risk climate," says James Stack of InvesTech Research. "The odds of a recession in the next 18 months are quite high and growing."

Those kinds of pronouncements are becoming more common and may have you thinking about switching to bonds, especially if you're near or in retirement. But do that and you'll get creamed by inflation.

To fight the effects of rising prices over a two- or three-decade retirement, you need stocks. From 1926 to Nov. 30, 2007, the S&P 500 returned 10.4 percent a year. Long-term U.S. government bonds returned just over half that.

"It's prudent to have less in stocks at age 60 than 30, but zero isn't the answer," says Alicia Munnell, head of the Center for Retirement Research at Boston College. Munnell says target-date funds, which shift to a more conservative asset mix as you age, are a good benchmark.

Vanguard's and T. Rowe Price's funds keep about two-thirds of their portfolios in stocks as investors approach retirement, and gradually lower that amount to 30 percent.

The prudent conclusion: Investing too conservatively will do you more harm than good. Dial down your stock allocation over many years, not in a panic.
Last updated January 17 2008: 5:45 PM ET

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.