I consider myself a pretty conservative guy. I maintain a savings account that I don’t touch unless someone I love is in the hospital, I never gamble my money away, and I don’t carry debt. This is why I never saw myself playing the stock market, which to me seemed like an unnecessary risk, but here I am.
The stock market is extremely volatile, which means that there is potential both for great loss and for great gain. Someone with a low risk tolerance (read: me) would tend to steer clear of that scenario because of the risk. In most cases, I’d rather keep the money I have now than risk reducing my net worth because of a possible windfall.
However, as I get older, I find that my retirement portfolio is far more important to me. When I retire, I want to know that I’ll have sufficient money in the bank to keep myself and my family safe. While I intend to work well beyond traditional retirement age, at that point I want to be working because I love my job and not because I need to keep a roof over my head.
The reality is that bonds, while safe, don’t guarantee a solid future. The returns are so small compared to stocks that they constitute an entirely different risk.
According to Fool.com, a survey of stocks and bonds gains over a seventy-seven year period revealed that treasury bonds experienced average annual returns of 5.7 percent, while large- and small-cap stocks experienced average annual returns of 10.42 and 12.7 percent respectively. What most people (including me) don’t always realize is that the stock market is volatile, yes, but that it swings in both directions over time.
The point of retirement savings is to increase your net worth over a period of many years so that, upon retirement, you can live off the money you have accrued. It isn’t like saving for a family vacation or a big-screen television; short-term losses don’t mean you’ll wind up living out of a cardboard box. Quite the contrary, since the rewards correspond proportionally to the losses.
Furthermore, a well-diversified portfolio means that losses are spread out over a wealth of investments. The gains in one stock can cancel out, or even surpass, the losses in another, and as long as I’m vigilant in managing my retirement portfolio. This is the inherent benefit of stocks over bonds.
As I get older and learn more about the stock market, I realize that my micromanagement tendencies actually benefit me when it comes to retirement planning. Bonds are very low-maintenance, which can seem like a benefit, but they also remove some of the control from my retirement portfolio. All I can do is sit back and watch.
With the stock market, I find I can make changes according to research and to tips from my financial adviser. Stocks give me control over my financial future in a way that bonds never could; while I can’t control the gains and losses in any particular investment, I can control how long I stick with an investment and when I want to bail out.
I’m not saying that everyone should get out of the bonds business and head straight for stocks. A portion of my retirement portfolio (currently 23 percent) is investment in bonds, and I intend to maintain that ratio for the foreseeable future. However, I also came to this decision through copious research. Now that I understand where my money goes and how it benefits me, I feel equipped to make those decisions.