3 reasons to take a risk when investing

Principal investing Q4 #1

As a young investor, you’ve probably got three or more decades
to earn money before reaching a traditional retirement age.1 Yet,
if you’re like many young people, you may be thinking more about
stability or financial independence than long-term growth
potential.

“That may be a mistake,” says Robert Payne, a financial
professional with Principal® in Greensboro, North Carolina.
Investing too conservatively when you’re young may leave you
financially vulnerable in the future.

Many employers offer 401(k) and 403(b) plans (some with matching
contributions). So it can be easier to get started. 

Your 20s and 30s are generally the ideal time to consider
investing in stocks and other higher-risk investments via your
employer’s
401(k) or other retirement plan
. Here’s why:

1. Time is on your side.

Stocks have historically generated strong returns over long
periods.2 What’s more, time can be on your side based on historical
returns. This means that the earlier you invest the more time you
have to potentially see the benefits.

“If you’re young, you might not need that money for 30 or more
years, so it may benefit you to stay invested in the market,” Payne
says. “Stocks have historically done well over periods that
long.”

2. Inflation can still put “safe” at risk.

Inflation is the general increase in prices over time. Even if
the dollar value of money in savings accounts never declines, it
doesn’t mean your money is safe.

Inflation erodes the purchasing power of that money as time
passes — sometimes more powerfully than a market decline. At a
historically average 3% inflation rate, the value of a dollar you
save today will be cut in half in 24 years.

Even accounts that pay a fixed
interest rate
may lose ground after inflation. Stocks, on the
other hand, historically have outpaced inflation — sometimes by a
wide margin.3

3. You can get help.

A financial professional can help educate you on investment
risk, so you can make more confident decisions about investing in a
retirement plan. If you’re worried about picking the “right”
investments, one possibility may be a target date fund (if your
organization offers one).

Target date portfolios are managed toward a specific date, which
may be the date you plan to retire and expect to withdraw the
money. As the portfolio approaches its target date, the investment
mix becomes typically more conservative.4

If you want to retire earlier or later than average, you may
want to consider an investment option with an
asset allocation
more appropriate to your situation.

Like financial independence, but FIRE leaves you cold?

Followers of the FIRE lifestyle (financial independence, retire
early) live ultra-frugally with the goal of retiring as early as
their 30s or 40s. But FIRE isn’t for everyone.

Isak Knivsland, a 24-year-old user experience designer from Des
Moines, Iowa, sees the FIRE community as a benchmark. “FIRE sites
and message boards give tips and information on saving and
spending,” Knivsland says. “But FIRE also incentivizes some weird
mindsets. Focusing on financial independence is important, but you
just need to find balance.”

What’s Knivsland’s approach to financial independence and
investing? A well-stocked
emergency fund
. “With a full year’s worth of fixed expenses,
I’m far more comfortable taking investment risk with the money that
I set aside for retirement and investing,” he says.

Know your goal and take the next step

Investing aggressively is more than just choosing the right mix
of investments. Know what you’re investing for and if you’re
setting enough aside.

“You can’t guarantee a certain return, but you do have control
over the amount you save,” Payne says. “Set a realistic savings
goal and stick with it.”

Have a retirement account from your employer with service at
Principal? Log in to
principal.com
to see what you’re allocating to stocks. First
time logging in? Get
started
.

Already have a financial professional? They can help you figure
out how investment risk works with your goals of financial
independence. If you’d like to meet face to face, find one near
you
. 

This post was created by Principal with Insider
Studios

1 Based on the Social Security Administration’s definition of
“full retirement age,”
https://www.ssa.gov/planners/retire/retirechart.html.

2 Source: Standard & Poor’s.

3 Of course, it’s important to keep in mind that any investment
option is subject to investment risk. Shares or unit values will
fluctuate, and investments, when redeemed, may be worth more or
less than their original cost. It’s possible for any investment
option to lose value.

4 Neither asset allocation nor diversification can assure a
profit or protect against a loss in down markets. Be sure to see
the relevant prospectus or offering document for full discussion of
a target date investment option, including determination of when
the portfolio achieves its most conservative allocation.

” “

 


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3 reasons to take a risk when investing