Investment Conservatism Can Be a Risky Business

Americans are being pushed into making a numbing number of investment decisions on their own as corporate downsizing and restructurings push more people into the ranks of the self-employed and as corporations shift from company-managed pensions to employee-directed retirement plans such as 401(k) and 403(b) programs.

For many, these trends are befuddling.

What percentage of savings should be invested in emerging-market funds? What amount in domestic equities? Bonds? Are annuities a smart choice? And a job change creates the chance to transfer tax-deferred savings to an individual retirement account, an option that raises a whole new set of often-confusing choices.

Without professional guidance or a considerable amount of informed attention to the financial markets, the entire process can appear frightening, particularly given the seemingly steady stream of stories about financial scams and collapses robbing Americans of their retirement savings.

But despite the attention given to victims of criminal schemes or of incompetent advisors, surveys have repeatedly shown that American workers are far more likely to be harmed by their own investment conservatism--a trait stemming from a lack of financial knowledge and an aversion to taking risk.

Consider: Thirty-year Treasury bonds--a safe long-term investment--have earned an average annual return of roughly 5% during the 71-year period tracked by Chicago-based Ibbotson Associates. Meanwhile, riskier investments such as big-company stocks have earned more than 10% on average.

What does that mean in dollars and cents? A person who invests a retirement nest egg--let’s say $10,000--in bonds ends up with $44,677 in 30 years. The person who invests the money in stocks over the same period has $198,374--more than four times as much.

Is this pattern of returns set in concrete? No, and it could even reverse for a fairly long period. But odds favor it, because the stock market reflects the overall profitability and growth of the private business sector. With bonds, investors simply earn interest by lending money--and hoping they can beat the inflation rate.