September 4, 2014

Myth #1-Cash is “safe”

Reality Check-Money Market, Savings Accounts, T-Bills, and Cash under the mattress are all considered cash equivalents. These are great vehicles for short-term investments or emergency accounts.  These are not the best vehicles for long-term investments since you have inflation working against you and may have negative returns after taxes and inflation.  Also, many people make the mistake of thinking that retirement is a “finish line” and they need to get very conservative with their investments at this time.  Many folks need to remember that they may spend several decades in retirement and may need some stock and/or other forms of growth in their portfolio to combat inflation.

Myth #2-The stock market is dangerous

Reality Check-Investment vehicles are rarely evil or saintly. What really matters is using the most appropriate tools for your situation. Market risk is chance of the value of your investments going up or down with the market. There are several other types of risk; such as inflation (or purchasing power), reinvestment (the ability to reinvest your bonds at the same interest rate), industry risk, business risk, etc.  It’s important to understand why you are saving and match the investments to the time horizon and nature of your goal. For instance, if you plan on buying a car in a year then you probably shouldn’t invest your “car-placement savings” in the stock market since markets fluctuate widely in the short-term. However, if you have a longer-term goal, you may need to take market risk in order to combat inflation.

Myth #3-Always maximize your retirement account contributions first

Reality Check-Most people have more than one goal and many times we have conflicting goals.  We may want to buy a house in the short term, pay for a child’s college education in the next 10 years, and then retire 20 years from now.  It’s important to map out the timing and the funding need of each of your goals so you save appropriately in the right types of vehicles.  For example, if you know you are buying a house within the next 2 years, it may make sense to have some of your savings go towards a taxable account so you can have a smaller mortgage.  It’s okay to increase or decrease the amount you’re saving in different vehicles, so that you are optimizing your future distributions.  The last thing you want is to pay extra taxes and penalties on money that could have been saved a different way.

© Clark Nuber PS, 2014.  All Rights Reserved

This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.