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...
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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