Following the Great Recession of 2008, many retirement plan investors, particularly young investors, have made very conservative investment decisions in their retirement plans, if they have invested at all. The scars left by the Great Recession have significantly outlasted both the recession itself and the ensuing market recovery. While it is prudent to be mindful of the risk of loss in your retirement plan, investors are wise to consider the costs of “playing it safe.”
Fortunately for conservative investors, the six-plus years following the Great Recession have been characterized by very low inflation. However, historically, more conservative investments yield lower returns that may keep up with inflation, but do little to outpace it. This result is suitable when you have already built a portfolio to support your retirement goals, but young investors need higher returns to help build their nest egg.
Younger investors are wise to focus on growing their portfolio, both by saving more and by seeking higher returns on their investments. The longer the time horizon before they begin using their portfolio to fund retirement means they have more time to recover from market declines, and more time to benefit from the higher returns that historically come from more aggressive investments. According to Morningstar data, since the end of World War II, market downturns of 10 percent or more have taken an average of only 15 months to recover.
As investors get closer to the time they will begin making withdrawals, their focus should shift towards protecting their investment. For these investors, more conservative investments that are less likely to decline as severely in a market downturn are a more appropriate choice.
Ask yourself the following questions to help determine your appropriate level of risk:
- How old are you? The younger you are, the more aggressive you may want to consider being.
- When will you begin needing these investments to fund your retirement? The longer the time horizon, the more aggressive you may want to consider being.
- If your portfolio decreases in value, are you more likely to “ride-it-out” or sell your investments? If you are more likely to “ride-it-out”, you may want to consider more aggressive investments.