Sabot L'ours (sabotlours) wrote,
Sabot L'ours

Risk and Reward

It's a Money Bear post! During the presidential campaign our now-illustrious leader made a statement about cushy, bloated, government pensions. At one time that might have been the case, but for all of my career the retirement plan was pretty much like any 401K plan from a large corporation. What I'm going to take out is based on how much I have put in. The success or failure of my account is largely based on market forces. There are 5 places where I can place my money; a fund based on government bonds (essentially T-Bills), a corporate bond fund, a large-cap stock fund, a small-cap stock fund, and an international stock fund. I can divide up my contribution to any of the 5 funds. The government bond fund is super safe. It will never be negative, but has had very low returns over the past several years. The corporate bond fund is also pretty safe, but it can give a negative return in bad years. The three stock funds are risky because they are at the whims of the Market. I took a major hit during the Great Recession, but I have reaped the rewards of the Market since then.

There are many rules in investing. The first and foremost rule is simply to do it. Put aside money every month for the long-term. Make it so that it's automatic. The rule of thumb is 10% which might be tough for some, but doable. Another rule is that the riskiest behavior is to have no risk. In order to really make your money work for you, you have to put your money in some risky places i.e. the Market. I had money in the super-safe government bond fund as a hedge. I was advised that it is currently a very bad move. It's paying such lousy returns that it is no longer a good hedge. Earning 2% is a bad thing. You might even lose money due to inflation at those rates. When I first started saving it was a much better hedge with rates of 5-6%. Another rule of investing is to diversify. Don't put all of your eggs in one basket. I did a little study, however, and found out that it might not be the best bet.

I compiled monthly return values for the past 30 years for all 5 of the funds. I then took a constant value for a monthly contribution. I then ran various scenarios using different asset allocations. What I found out was that had I put all of my money in US stock funds, I would have made the most money. Adding in a little foreign stock didn't really help. Diversifying a little into corporate bonds didn't help much either. Adding the government bonds made things worse. Investing only in government bonds was the absolute worse earning only 66% of what the all-stock strategy yielded. Having a completely balanced portfolio ended up somewhere in the middle. So it certainly is true that the most risk yields the greatest rewards. If you can stomach the roller coaster ride, it might be worth the risk to hop on board. And yes, I might have to do some re-balancing in my investments in light of my findings.
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