How should I invest?

CNN Money

Your retirement savings are sacred, so you don't want to take crazy risks. That doesn't mean you should rely solely on safe investments such as bank CDs and money-market funds.

To build a nest egg large enough to see you through retirement, which may last 30 years or more, you'll need the growth that stocks provide.

From 1926 through 2010, stocks — broadly speaking, using the S&P 500 index as a measure — have posted an average annual return of roughly 10%, versus little more than 5% for bonds, according to Ibbotson Associates.

Given stocks' superior long-term returns, some financial advisers recommend that investors whose retirement is still 20 years or more away put the lion's share of their portfolio in stocks and stock funds.

Of course, a 100% stock portfolio can give you some hair-raising moments (or years). In the 1973-74 bear market, for example, U.S. stocks lost 43% of their value and took three-and-a-half years just to get back to where they started.

Moreover, those whose stock portfolios are concentrated may suffer even more dramatic ups and downs.

If you don't have the stomach for steep downturns, a more prudent course is to throw some bonds into the mix. As you approach retirement age, the idea is to shift more into bonds. But even in retirement, which can last a few decades, it may be a good idea to maintain a healthy dose of stocks (maybe upwards of 50% in your 70s, and up to 30% in your 80s).

Take care, however, to understand the kind of companies you're investing in. More volatile stocks may not be appropriate for you at this stage in your life.

For help on finding the right allocation for you, try CNN/Money's Asset Allocation Tool.




By clicking the above link, you'll leave this site and go to a third-party website. Ariel does not control the content or privacy practices of the other website and does not endorse or accept responsibility for the content, policies, activities, products or services offered on the site.



Past performance does not guarantee future results. © Ariel Investments, LLC. The mutual funds offered by Ariel Investment Trust are distributed by Ariel Distributors, LLC. Use of this website is subject to our Terms & Conditions of use. Each of the investment products, mutual funds or services referred to in this site may be offered only to persons in the United States. This web site should not be considered a solicitation or offering of any investment products, funds or services to investors outside the United States. Original illustrations © Omar Rayyan 2007.