Financial News & TipsAlan S. Moore / L’Observateur / March 22, 2000If you’ve ever visited an apple farm, you know that you usually can get your apples in one of two ways. You can buy a bag or bushel from thefarm’s store and quickly be on your way. Or, you can walk out in theorchard yourself and pick your own apples. This second method mayinvolve climbing a ladder and reaching for the best-looking apples, but the reward is often worth the extra effort. In some ways, investing forretirement is similar to buying apples.
Published 12:00 am Wednesday, March 22, 2000
Choosing Investments Typically, as a retirement plan participant, you can choose from among three basic kinds of investment: cash equivalents, bonds, and stocks. Thecash equivalents are generally considered “stable value” investments that seek to protect your principal while providing an income return. Forexample, the annual total return on Treasury Bills (as measured by the Salomon Brothers 3-month Treasure Bill Index) has averaged about 5.7percent for the last 10 years. Like the bagged apples that have alreadybeen picked, they’re relatively safe and easy. However, they may not beexactly what you need for your retirement.
With cash equivalents, a little worm called inflation may eat up a large part of the annual investment return. Since inflation (as measured by theConsumer Price Index) has averaged about 3.7 percent for the last 10years, that reduces the 5.7 percent growth rate on cash equivalents toonly 2.0 percent.If you’re willing to reach for a better return, you may want to consider bonds. Bonds involve more risk than cash equivalents, but they also offerthe potential for a better return. The annual returns on government andcorporate bonds are not as consistent as those of cash equivalents, but during the last 10 years, long-term bonds have averaged 8.4 percent (asmeasured by the Lehman Brothers Government/Corporate Bond Index).
Finally, at the top of the investment tree, you have stocks. Stocks are theriskiest of the three choices mentioned. Over the last 10 years, thoughlarge company stocks (as measured by the S&P 500) have returned 15.3percent annually on average, which is significantly better than cash equivalents or bonds. So, even if you don’t feel comfortable putting all ofyour retirement money is stocks, at least consider making them part of your investment mix.
Alan S. Moore is a Financial Advisor of Legg Mason Wood Walker, Inc., adiversified securities brokerage and financial services firm that is a member of the New York Stock Exchange, Inc. and SIPC.
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