Stock mutual fund investments and the relationship between investment returns and risk
As you are making family investment choices and financial decisions affecting retirement assets, individuals must understand the historical fact that, historically, more conservative portfolio investments have tended to yield significantly lower portfolio returns than more risky asset portfolios have yielded.
With returns adjusted for risk, a family simply cannot have it both ways. When an individual shoulders increased investing risk, a person might be able to invest more and save less, due to the fact that the RIO on such an investment portfolio is more often greater than a more conservative asset portfolio. However, you must realize that the expected results of this strategy are less certain.
Taking the opposite investment strategy, if you undertake not as much investment risk, individuals need to anticipate the need to increase savings and to invest more. Yet, the outcome is likely to be more certain. The choice about how to strike a personally appropriate balance comparing investment returns and investment portfolio risk is part science and part art. This is far from simple, because the future is fundamentally unknowable by anyone, until it comes.
You can test these tradeoffs by modeling scenario projections using a sophisticated personal money management software program. With measured historical rates of return, a high quality personal money management software program with asset value projection functionality will soon become clear that a selection of investment assets that emphasizes fixed income and cash equivalent investments will usually increase at a lesser rate than an asset allocation that is more heavily weighted toward stocks and equities.
Long-term success with more conservative assets will depend much more on continued high rates of saving instead of higher return on investment expectations. This requires greater adherence to a savings program to sustain as the years go by and over one’s lifespan. In contrast, investment strategies that emphasize stocks rely more on growth in the future value of financial assets. Although, these equity heavy investment strategies will still require significant savings — just at lower rates than a more conservative asset allocation strategy.
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