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Why Take Risk

Why take risk at all when it comes to investing? Because the greater the risk, the greater the potential reward. By investing carefully in such things as stocks and bonds, you are likely to earn significantly more money than by keeping all of your retirement money in a savings account.

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The difference in the average annual returns of various types of investments over time is dramatic. Since 1926, the average annual return of short term U.S. Treasury bills, which roughly equals the return of other cash equivalents such as savings accounts, has been 3.8 percent. The annual return of long term government bonds over the same period has been 5.3 percent. Large company stocks, on the other hand, while riskier in the short term, have averaged an annual return of 11.2 percent.

Let’s put that into dollars. If you had invested $1 in Treasury bills in 1926, that $1 would have grown to approximately $15 today. However, inflation, at an annual average of 3.1 percent, would have eaten 9$ of the gain. If the $1 had been invested in government bonds, it would have grown to $44. But if you had invested in large company stock, it would have grown to over $2,300. None of these rates of return are guaranteed in the future, but they clearly show the relationship between risk and potential reward.

Many financial experts feel it is important to save at least a portion of your retirement money in higher risk – but potentially higher returning – assets. These higher risk assets can help you stay ahead of inflation, which will eats away at your retirement savings over time.

How you invest your retirement dollars and which investments you include in your mix is, of course, your decision. And you should never invest in anything you don’t thoroughly understand or don’t feel comfortable about. If you can overcome your fear of risk, you may be rewarded with higher returns.

Remember to view our Investment Model Profiler to determine what type of investor your are and how much risk you can handle.

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