Thursday, January 11, 2007

Don't Risk Hundreds of Thousands of Dollars

One of my favorite msn articles talks about the importance of saving early for retirement. The article focuses on starting early so that you can get to 1 million dollars. However, one of the major points of this is that you should be tackling asset allocation with the same aggression that you tackle saving early. The article underscores this point.

The article explains that large cap us stocks grew at about 10.7%. However, it contrasts this growth with a later statement: "If you invested in small company stocks, whose long-term annual return clocks in at 12.5 percent annually, you could have much more money." It puts this figure at about 2.4 million. The importance of asset allocation cannot be denied, especially when compounding is considered.

Sure, small caps (those stocks which have less value in the stock market) are risky and volitile. The volitility comes from lots of different factors Mutual funds of large caps seem safer and therefore more desirable. However, when push comes to shove, can you really afford to waste 1/2 of your retirement earnings just because you were scared of a little risk? Ignoring asset allocation by choosing all large stocks, not being diversified, and ultimately sticking with investments that sap away several percent of your investments year after year is a sure-fire way of losing hundreds of thousands of dollars

It makes me want to rebalance myself right out of those target funds that I am in and take on some of this asset allocation business myself. Not that I think target funds are bad, per se. But if you could figure out a way to do it yourself, wouldn't it be worth the extra several hundred thousand dollars? That's the kind of money that I think I can make, not by doing anything fancy--just by staying a little more involved than the next guy.

1 comment:

Lazy Man and Money said...

"And you will have started and finished all of your saving before turning age 21."

I think it's funny, because it's not true at all. He seems to ignore inflation. In 50 years one million dollars would have the buying power of less than $180K.

So put me in the "yes" crew, because many people owning a home outright will be a millionaire in 50 years.