| SUBSCRIBE TO MONEY |
How should I invest?
In Lesson 13
| |||
| |||
Money 101 Lessons
|
Your retirement savings are sacred, so you don't want to take crazy risks. That doesn't mean you should rely solely on safe investments such as bank CDs and money-market funds.
To build a nest egg large enough to see you through retirement, which may last 30 years or more, you'll need the growth that stocks provide.
From 1926 through 2008, stocks - broadly speaking, using the S&P 500 index as a measure - have posted an average annual return of 9.6% versus just 5.9 % for bonds, according to Ibbotson Associates.
Given stocks' superior long-term returns, some financial advisers recommend that investors whose retirement is still 20 years or more away put the lion's share of their portfolio in stocks and stock funds.
Of course, a 100% stock portfolio can give you some hair-raising moments (or years). In the 1973-74 bear market, for example, U.S. stocks lost 43% of their value and took three-and-a-half years just to get back to where they started.
Moreover, those whose stock portfolios are concentrated may suffer even more dramatic ups and downs.
If you don't have the stomach for steep downturns, a more prudent course is to throw some bonds into the mix. Putting 70% of your portfolio into stocks and 30% into bonds, for example, will let you capture most of the long-term growth of stocks while sheltering your investments somewhat during meltdowns.
As you approach retirement age, the idea is to shift more into bonds. But even in retirement, which can last a few decades, it pays to maintain a healthy dose of stocks (maybe upwards of 50% in your 70s, and up to 30% in your 80s).
Take care, however, to understand the kind of companies you're investing in. More volatile stocks may not be appropriate for you at this stage in your life.
For help on finding the right allocation for you, try CNN/Money's Asset Allocation Tool.
-
Check out our interactive timeline to see Steve Jobs' early struggles and recent victories. More -
How Apple's imperious, brilliant CEO revived the company and transformed American business. More -
From forgettable phones to disastrous desktops, Apple is able to recover fast. Play -
Arson. Scrappers. Blackouts. It's all part of business for the last tenant in Detroit's Packard Plant. More -
Investors think Detroit's foreclosed houses are a deal. Would you buy this one for $6,900? More -
These rising stars, like Facebook's Mark Zuckerberg, have great jobs to fill. Here's what they're looking for. More
