Can you invest too conservatively?

Nicole Sara Sivens
February 22, 2018
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Better safe than sorry, right? Not always. 

Investing too conservatively is possible and you might be doing it, despite your best intentions. Depending on your age, expenses, assets, and income, your investments could be very conservative and also just right for you. But if you make the mistake of investing too conservatively for your situation, you may be risking the very thing you are trying to protect most – your long-term financial security.

What does a conservative approach look like?

Taking the advice from this article about diversifying your investment strategy, we’ll use its examples of conservative and aggressive portfolios.

A conservative portfolio could be almost three-quarters bonds and CDs, which are generally safe, with the remaining quarter into stocks and cash.

An aggressive portfolio that is exposed to more risk, but poised to grow with the market, could be more than half stocks and just one-third traditional assets like bonds and CDs.

When does it make sense to invest conservatively?

As you get closer to retirement, those little shifts in the market could mean big losses for you – it’s all in the timing. Since you’ll need access to your funds in a relatively short period of time, it’s best not to be too, too wild with them.

When should you invest more aggressively?

When time is on your side, it's time to invest aggressively. Because you don't need to access your funds in the near future, you can take on additional risk. You've got your entire career ahead of you, so by starting to save and invest now you'll set yourself up to enjoy your paychecks – instead of playing catch up down the line. You don't want to put it all into riskier ventures, like crypto, but you can certainly afford to step out of the super-safe bond zone.

The real cost of investing too conservatively

While the annual contribution limits are currently $18,000 for a 401(k) and $5,500 for an IRA ($24,000 and $6,500, respectively, if you're 50 or older), most of us can't max out our retirement plan contributions because we need that money to, you know, live. But you can choose the right investments to maximize the amount of money you're able to save.

Take this allocation example from a 2016 Wells Fargo study and consider what $10,000 invested in two different ways 40 years ago might look like today:

A portfolio allocation of 70% stocks and 30% bonds would have grown to $581,295 from January 1, 1976, through September 30, 2016.

For the same time period, $10,000 invested in 30% stocks and 70% bonds would have grown to $336,715.

How can you decide if you’re investing too conservatively?

When evaluating your risk tolerance, ask yourself:

What is your investment horizon? The longer it is, the more ability you have to take equity risk.

What is the value of your human capital - in other words, what is the value of the skills, knowledge, and experience you possess? The more stable and predictable, the more ability you have to take risk.

How liquid do you need your funds to be? With increased access to cash, the more ability you have to take on risk.

There’s no magic number or exact right thing to do, it’s best to evaluate your current situation and move forward doing the best you can with the knowledge you have.

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