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The third significant retirement mistake to avoid is being overly conservative in your investment portfolio. Conservative investing often involves low-volatility, low-risk, and seemingly safe investments, with bonds being a common choice. While bonds may be less volatile in the short term, sustaining a 30-40 year retirement requires exposure to equities for potential long-term growth.
Furthermore, bond prices are inversely related to interest rates, meaning that if interest rates rise, the value of your bonds could fall. So, if you need to withdraw from your bond investments when interest rates are increasing, you might end up selling them at a lower price than you initially paid. In practice, overly conservative investing, while providing peace of mind, may not be suitable for long-term financial sustainability in retirement.
The third biggest mistake to avoid in retirement is being too conservative inside of your investment portfolio. When people think about conservative investing, the the connotation is low volatile investments, low risk investments, investments that are safe, predictable, even sometimes having guaranteed returns.
Um, but one of the main instruments that people associate with conservative investing is investing in the bond markets. And in the short term, we have found that bond markets do tend to be less volatile than equities.
But however, over the long term, in order to sustain potentially a 30, 40 year long retirement, equity exposure is going to be required. And moving forward on that point, bonds are inversely related to interest rates.
So assuming that if interest rates rise, the price of your bond could fall. So if you needed to take a distribution from your bond account at a time in which you needed it and interest rates were rising, you could be selling a bond at a price lower than which you paid for it.
So conservative investing, while it may sound good from a peace of mind standpoint, practically it may not make sense.
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*See reference 1 and reference 2 for more information about the above-mentioned statistic.
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