The Riskiest Investment

January 23, 2005 -- Some folks just can't stand the thought of losing money. Well-meaning investors, fearful of the fluctuations of the stock market, decide the safest place to put their nest egg is in the 'safety' of fixed investments, like CDs or government bonds. They've heard horror stories of friends who lost a bundle in the 90's 'Tech Bubble' or in the aftermath of 9/11. "That'll never happen to me," they say. "I'll never put my nest egg at risk." But they don't realize that their actions are bringing about the very thing they fear the most.

To understand the risks of being 'overly risk adverse', you first have to understand the two basic types of investments. I call this analogy "Loan vs. Own". You can either loan your money to someone or you can own something with it. That's simple enough, isn't it You can loan your money to the bank, the government or a corporation. You can own something by buying a home or other real estate, owning a small piece of a company by purchasing its stock, or by investing in a stock mutual fund.

Loan investments are designed to provide a stable source of income but don't protect you from rising prices. Own investments, such as mutual funds that invest in stocks, are designed to protect you from rising prices but have a return that fluctuates.

Think of it this way. Most people buy homes instead of renting because they know that over time their home will appreciate in value and be worth more in the future than what they paid for it. Renting, most people feel, is like putting their money down the drain-you don't get anything for it in the long run other than the dividend of a place to live.

Your home will fluctuate in value depending on interest rates and the economy in your area. There are some months and years your home will actually lose money, but that doesn't mean a home is not a good investment because, generally, real estate will appreciate in value over a period of 5 or 10 years.

So here's the bottom line. For money you plan to use in the next 1-3 years or for that portion that you must have to provide income, it's better to rent your money-to use loan type of investments. The other portion of your money should be used to buy investments where you own something that'll appreciate in value over time.

This brings us back to our main point; investing the money you need for the long term in mostly 'loan' type investments will actually cause you to lose money in the end. The Rule of 72 clearly illustrates this point by allowing you to quickly estimate how long it will take you to double your money. Say you're earning 5% on a fixed investment. By dividing 72 by 5, you find it'll take you almost 14 1/2 years to double your money. Even a small increase in return makes quite a difference. At 7% interest, it would take just over 10 years for the same results.

When you consider that the historical average annual stock market return has been 10-12%, compared to 6% for fixed investments, you can see that it can take twice as long to double your money with 'loan' type investments. With life spans constantly increasing, most retirees will be depending on their nest egg for 25 years or more. You can't afford to 'safely' park your nest egg in bonds or CDs and hope to maintain your current lifestyle, unless you have a very large nest egg.

It's true that over the past couple of decades 'loan' investments have performed very well. That's mainly because we've been in an environment of falling interest rates. When rates fall the value of a bond increases. That trend is coming to an end. Bonds are not expected to repeat their past performance in the foreseeable future.

Keep in mind, with the right advisor, the volatility of investing in equities can be reduced through proper management. So if you're serious about achieving and maintaining the lifestyle you desire, you must take steps now to make those goals a reality.

For free, clear, unbiased advice send your questions to e-mail protected from spam bots. You'll be glad you did.

Mr. Voudrie is a Certified Financial Planner, nationally syndicated newspaper columnist and President of Legacy Planning Group, Inc., a Private Wealth Management Firm in Johnson City, TN. He can be reached toll-free at 1-877-827-1463 or at e-mail protected from spam bots

Looking for an energetic expert who is passionate about financial and wealth management Mr. Voudrie is an excellent speaker who will excite and inspire your audience. Mr. Voudrie is available for a limited number of speaking engagements, television appearances and radio talk shows. For booking information, contact Christine Lavender at (877) 827-1463 or email e-mail protected from spam bots.

Related Articles can be found at www.guardingyourwealth.com under the Guarding Your Wealth Article Archive.

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