The Risk of Avoiding Risk
Submitted by The Participant Effect on March 2nd, 2020
What comes to mind when you think of investment risk?
• Picking the wrong mutual funds for your 401(k)?
• Buying into a tech bubble?
• Purchasing a stock based on a tip from your buddy?
• Having too many stocks in your portfolio too close to retirement?
Indeed, some of these things quite legitimately could be considered risky. But have you given any thought to the risk of doing nothing? In other words, the risk associated with not investing your money, not contributing to your 401(k), not increasing your contributions on a regular basis, waiting to start investing? Or perhaps not even facing the idea of retirement planning at all?
Choices like these may in fact be among the riskiest behaviors of all when it comes to investing.
It’s pretty clear that unless you actively take charge of — and plan for — your retirement, no one else will do it for you. And when the day comes that you’re no longer willing or able to work, you won’t have the funds you’ll need to enjoy a comfortable retirement.
It’s very easy to let retirement planning become one of those “I’ll start next year” items on a perpetual to do list. There may always seem to be a compelling reason that you can’t “afford” to take some portion of your earnings and put them away today for tomorrow’s retirement. Maybe you’re saving up for a car, a vacation you badly need, a wedding or starting a family. Sometimes it can feel like there’s just never a good time to start.
According to Vanguard, one person at age 25 who starts putting away $10,000/year into their retirement account for 15 years with an employee match will have contributed $150,000 into their account and end up with more than $1 million by age 40, while someone else who waits until age 35 to start saving at the same rate with the same match over 30 years (twice as long) will have contributed $300,000 during that time, yet their account would only be worth around $838,000 by age 65.
Delaying saving for retirement can cost you — a lot.
Another way that excessive risk avoidance can be a risk in and of itself is when, in an attempt to avoid investment losses, you fail to put yourself in a position to capitalize on upswings in the market. It’s important to remember that your gains are always offset by the effects of inflation increasing your cost of living over time. If, for example, you aren’t earning 3% interest during a period where inflation is also at 3%, you’re not making any headway.
Investing can be intimidating. After all, some degree of risk is inherent in the process. But it’s important not to let fear stand in your way of building a solid financial future. Doing things like investing over a longer number of years and at regular intervals (dollar cost averaging) can help even out the bumps along the way.
Gaining an understanding of what exactly you’re investing in and the overall allocation of your assets, as well as how a prudent investment plan can help mitigate risk, may help you feel more confident to move forward.
Sitting down with your financial advisor to discuss your concerns, learn about managing risk and invest in a manner that’s in line with your individual risk tolerance is a great place to start.
ACR# 342330 02/20