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Beware of Vanishing Money

Consider this fun fact: If you had put one dollar in a jar in 1976, it would be worth about 23 cents today. In just 40 years, thanks to inflation, your buying power has shrunk by over 75 percent. Think of it as the incredible disappearing money trick. Over your working years, without proper financial planning and investing, your hard-earned cash could vanish right before your very eyes. Poof!

Thankfully, thoughtful investing can help you avoid this incredible disappearing money trick.

Investing Has Its Risks Too

Of course, when you take that important first step to begin socking away money in your 401(k), IRA or other retirement savings tools, managing and understanding investment risk is crucial to your future financial security. Consider these two cautionary tales when it comes to your retirement portfolio:

Risk #1: Owning Too Much of One Stock

Employees may have the opportunity to invest in their company’s stock, often as part of their 401(k) or through stock incentive plans. Either way, putting too much of your retirement nest egg in one basket can throw your portfolio out of balance and expose you to unnecessary risk. If that stock takes a tumble, so does your savings.

So, how much is too much? As a general rule of thumb, it’s wise to own no more than 10% of your total portfolio in your employer’s stock. Of course, that number will vary from person to person, so you should consult a professional about what is best for you.

Risk #2: Improper Asset Allocation

Investing in a proper mix of stocks, bonds, and cash is one of the most important strategies for growing and protecting your retirement nest egg. But how much of each asset class is ideal for your particular situation?

If you’re in your 20s or 30s, you can probably tolerate a portfolio more heavily concentrated in stocks, which tend to experience more up and down movements. You have the time to ride out any potential market volatility.

On the other hand, if you’re getting closer to retirement, you may want to invest more conservatively, and the percent of bonds in of your portfolio should be greater, as they tend to experience fewer up and down movements. In general, as you get older and closer to retirement, your portfolio should gradually shift from more aggressive (equities) to more conservative (bonds). If you’re not sure how to choose the best investment mix for you, Jemma Financial can help.

With Risk Comes Reward

The good thing about taking on a bit of risk in your portfolio is that it usually comes with a reward—namely, higher returns. Historically, stocks have enjoyed the most robust average annual returns over the long term compared to corporate and Treasury bonds.

With a diversified investment portfolio made of stocks and bonds, you can lessen some of your risk, and put yourself on a path to achieving your retirement goals.

You’re In It for the Long Haul

Yes, investing in your 401(k) may mean a smaller paycheck and taking on a bit of risk. But due to the “incredible disappearing money trick,” keeping all of your savings in cash can be even more detrimental. Over time, inflation can rob you of your buying power—something you cannot afford to lose. With time on your side, you can weather the storms of market volatility and emerge in your retirement years with a sufficient amount of money to live on. Let Jemma Financial help guide the way.

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