Millionaire Librarian

Something common among older generations is that they take little risk with their portfolios. Many people prefer the safety of CDs because they have worked hard for their money and do not want to risk it on investments that can drop dramatically.

The problem with “safe” investments is that they lose money annually to inflation, as their returns often barely match inflation rates. Inflation destroys the purchasing power of your money over time; at 3% inflation, approximately half of your money’s value is lost after 24 years. To achieve growth, one must invest in assets that provide a sizable return, such as stocks.

Over the last 15 years, the S&P 500 has returned 13.8%. To achieve this higher return, you must withstand the volatility of the stock market, which can experience sharp declines but has always returned to all-time highs. However, many economists argue that past returns are not indicative of future results.

Whether you want to be more conservative or more aggressive with your portfolio, you manage this through asset allocation. This means adding more bonds to reduce risk or more stocks to increase growth potential. Regardless, I would be wary of holding less than 60% in stocks, as you would lose the growth engine that propels a portfolio forward.

The problem with aggressive portfolios is that people sell when there portfolio falls. In a stock market pull back, something usually is causing the pullback. You think that this time is different and more dangerous than previously. Look at this scary thing happening! Say the market has dropped 20%, I guarantee if you decide you have had enough and sell then soon enough the market will redirect course and drive upwards relentlessly past all previous market highs.

Like JL Collins says you must tie yourself to the mast and withstand the storm. You must view pullbacks as buying opportunities. If you can’t tie yourself to the mast then our advice will leave you bloody and in the ditch.